Everyone works for Money at the end of the day. As employees, you get a fixed salary on a per annum basis in return for your services to a given organization. You can be associated with any company and industry vertical. But your salary is something that keeps you going every single day because it’s hard-earned by you for your daily fixed hours of effort to that company.
Based on your total package you get a monthly salary in your account either at end of every month or at the start of the next month. But there are a lot of components associated with your monthly salary and annual package which everyone must know about.
The trends in employee payroll management have changed significantly and employees’ salary structure today is a bit more complicated and detailed as compared to what it was a couple of decades ago.
In this blog, we are going to help you decode your salary and show its various components that make up for the total amount a company has to pay you for availing of your services.
Decoding the Breakup of Your Annual Salary Structure
Your salary constitutes a large number of components which you must know as a responsible employee of a given company.
When you are hired at a company, the first thing to get to hear is your CTC also known as Cost to Company. This is the total amount of money that an organization has to spend to retain its employee in the company. You will know about this when you first apply for the job or when you get your joining letter which clearly states your CTC for the given job profile.
Now let’s breakup your CTC and look into its various components.
- Basic Salary
- Gross Salary
- Net Salary / Take Home Salary.
- Allowances
- Arrears
- Gratuity
- Reimbursements
- Provident Fund
- Insurance / ESIC
- Loans
- Income Tax
- Professional Tax
Let’s dive into each of these ones and see what each of these stands for.
Basic Salary is the primary component of your CTC which is usually a fixed amount that varies according to your profile and designation, as well as your industry and your experience. In terms of percentage, your basic salary can account for 40-50% of your CTC. It is taxable.
Next comes the Gross Salary which is the total of your basic salary and all other components/allowances combined.
The formula for gross salary = Basic Salary + Allowances.
Then comes the net take-home salary which equals subtracting all the deductions from the gross salary. It’s the amount that an employee receives in his/her bank account (also called as in-hand salary). The formula goes as –
Net Take Home Salary = Gross Salary – All the Deductions and Taxes.
Let’s Explore this High-Level Salary breakup in Further detail.
The section of deductions and taxes in the above formula consists of the below aspects as part of the total CTC of an employee.
- Allowances are the extra benefits that an employee receives from a company based on their designation and profile. These include aspects like House rent allowance, conveyance allowance, leave travel allowance, mobile allowance, medical allowance, dearness allowance, etc.
- Then comes Arrears. This is the amount that a company is liable to pay to their employee after rectifying any salary calculation mistakes for the previous cycle.
- Next, we have Gratuity. This is the amount that an organization pays to their employee once they have completed 5 years of continuous service with them. This component denotes a way of saying thanks to an employee from the side of the organization and is often a part of the overall CTC of the employee.
- Reimbursements are the amount that an organization pays to their employee after showing proof of spending. This is the company’s way to compensate the employee for the spending done which can be for a wide range of aspects. The type of areas covered here varies from company to company as they usually try to keep limited
options available here and only the ones that make the most sense. - Then we have PF also known as Provident Fund. It’s a fixed amount that the company deducts every month from your monthly Gross Salary based on your CTC and contributes towards your retirement benefit. It constitutes the Employee Share as well as the Employer Share. Applicable to companies that employ more than 20 workers and can be withdrawn only when the employee retires.
Here are some of the Other Deductions Components of Your Yearly CTC.
- Insurance / ESIC refers to the medical insurance that the company provides to the employee with 1-year validity and a maximum amount of 1 Lakh. This component may or may not apply to you based on your monthly gross salary limit.
- Next, we have loans and advances which a company gives to their employees in the form of advance monthly salary. This means if you need a loan for any reason, you can get your next month’s salary in advance after you fulfill a set of conditions defined by the organization.
- Income Tax is another component that you pay to the government and it constitutes a major chunk of your salary. It’s a tax that you have to pay based on your income bracket that goes towards government funding public services.
- Last but not least, we have Professional Tax which state governments levy on the income of salaried personnel. Before a company pays the wages to their employees, they deduct this from their Gross Salary. The final amount also depends on the income slab of the employee.
To Wrap Things Up
Salary is a crucial result of your employment with any company. Everyone must have a fundamental awareness of the various components of their salary structure.
Companies across industry verticals use high-quality cloud-based Payroll Management Software solutions to seamlessly maintain the payroll aspects of their employees. It’s highly important to roll out employee salaries on time and these cloud- based tools help to achieve those goals efficiently.
