The most important factors to be considered while finalising "Compensation Struc

ture" are -
1. Must be in line with 'Industry - cum Region' comparison
2. Employer's capacity to pay ( Profitability of the company)
3. Demand and supply situation of particular 'skill'
4. Location of the company ( General standard of living )
5. Some part must be linked with linked with Performance
6. Rewards for good achievement ( at Individual & Company level)
7. So9me part taking care of 'Inflation' ( concept of D. A. )

The components Basic, HRA, Conveyance are standard and you can add allowances in
gross salary which is paid monthly and its taxable.
LTA and Medical bills are added in CTC(Yearly/Haly-yearly) which is paid against
bills. If Bills are not submitted by the employee, then the amount will be paid
as allowance at the end of the financial year/half-yearly with tax(Depends upon
your co policy). PF(Employer) and other components are also added in CTC.

salary components are Basic-60% and HRA - 40%. in most of the P F offices in Ind
ia insists that we have to deduct PF only on 60% though there is no Provision in
the EPF Act to deduct EPF on the 60% of basic salary.

Essential components of your salary:-

1. Basic Salary - The basic salary is used to calculate other components (like H
RA, PF etc.) of the salary. Basic salary is always taxable and hence ideally is
not kept more than 40% of the Cost to Company (CTC) but then keeping it very low
may also cause the reduction in other constituents of the salary. It is up to t
he finance department of the company to decide the amount of basic salary.
2. House Rent Allowance (HRA) - House Rent allowance is a very crucial part of t
he salary structure. It is usually (but not necessarily) 40 - 50% of the basic s
alary. Out of the HRA received during any financial year, the least of the follo
wing is exempt from the income (hence tax)
The actual HRA Received (as decided by the company)
50% of the basic salary in metros and 40% in other areas
Actual rent paid minus 10% of the basic salary
Of course also note that the full HRA becomes taxable if you do not pay any rent
. You will have to produce rent receipts or rental agreement to claim the allowa
nce.
3. PF Contribution Provident Fund is a you collect for your old age or maybe som
e emergency. It has a statutory requirement that a minimum of 12% of the basic i
s deducted and deposited in the Employee's Provident Fund. As an incentive from
the government to encourage you to save for future, Indian government gives an i
nterest at the rate of 8.5% per year on your money. The employer also makes a ma
tching contribution to the PF account. Here too a balance needs to be maintained
, with the basic salary. The higher the PF contribution, the more the reduction
in take-home salary.
4. Special Allowance Individual company can choose to provide you special allowa
nces (all exempted from tax based on only actual bills) for expenditure on thing
s like phone, petrol, books, food and grocery (using Sodexho coupons) etc. Remem
ber the Ticket Restaurant or Sodexho word written on the gate of grocery stores and
restaurants.
5. Medical Reimbursement All your medical bills (with a maximum of up to Rs 15,0
00 a year) will be exempted from tax under this part of your salary. This will b
e as per actual bills submitted and the balance will be taxable for the year. So
, save all your medical bills!
6. Transport/Conveyance allowance It is usually fixed and is exempt up to Rs 800
per month without bills.
7. Leave Travel Allowance - The amount paid by the employer to you and your fami
ly for leave travel to any place in India or for travelling to any place in Indi
a after retirement. This can be claimed twice in the block of 4 calendar years (
current block is Jan 2006- Dec 2009). This amount is exempt from tax, subject to
a maximum (usually the amount offered by the employer). If the journey is by ra
il, the amount of air-conditioned first class rail fare by the shortest route or
the amount spent, whichever is less, is not taxable. If the travel is by air, t
hen the economy class fare is not taxable.
8. Other allowance Rest of your salary comes under totally taxable allowance. It
is usually smaller than the basic salary. This is the part which actually canno
t be treated as any other constituent of the salary and is usually completely ta
xable.
9. Employee Stock Options The stock options are apart from the monetary compensa
tion discussed up till now. These are basically designed for retaining employees
in the company and are commonly known as ESOP. The company gives you either fre
e shares or gives you an option to buy shares at a discounted price if the emplo
yee decides to stay with the company for a fixed period. All stock options allot
ted to you may not be yours immediately, there may be catches about the vesting
period of your options.
10. Bonus - It is a part of your CTC, which is usually given once a year in lump
sum based on your and the company s overall performance. It is totally taxable as
a part of the salary. In some companies this amount is also variable depending
on your performance and you re meeting your Key Result Areas.
11. Gratuity - It is the lump sum amount paid by the company, when you either re
tire or resign from the company. Of course, you need to have worked in the compa
ny for at least 5 years.
Gratuity = Last drawn salary x 15/26 x No. of years of service"
Your last drawn salary will comprise your basic + DA. For computation of gratuit
y, your service period will be rounded off to the nearest full year. Gratuity up
to Rs 350,000 is exempt from taxes.

The medical insurance provided by them into your CTC. So, a package of 6 lakhs g
ets reduced to 4 lakhs per annum if they have included a 2 Lakh insurance covera
ge that they provide to you!
You bonus, gratuity etc can all be a part of your CTC, so be careful and ask for
the break up of the CTC/package quoted by the company before you ACCEPT the off
er.
If you have a joining bonus, it may be included in your CTC. It usually comes wi
th a clause that you will have to return it to the company if you do not stay wi
th the company for a pre-decided period.
 A deferred/ retention bonus is an amount paid by the employer to encourage you t
o stay for a period of few years. Sometimes, they include the per year component
of your retention bonus in your CTC. Like, if you have a retention bonus of 3 L
to be paid if you stay for 3 years. So, 1L may be added to your CTC per year bu
t you may not get it till 3 years.