Running a business is a realisation of an adventurous dream. Let’s admit you are more focused on product and services. You have a business idea, rest all takes a back seat. 😊 With the big dream you hire employees with huge packages. Salaries are paid unaware of taxes which remain un-deducted. At the financial year end you hire a consultant and realise you must pay taxes for the whole year, at the last minute. Frustrating?
Solution: Structure the Salaries. Are you thinking why?The answer is structuring salaries help deducting taxes on time, defusing the burden of sudden liability on an employer as well as employees and making it compliant with the statutory requirements of law.12 Basic salary components that gives you a simple and efficient salary structure. A happy employee by the end of the month for 12 months and a successful business with Income Tax filed efficiently.
Salary Components: It is simply divided into 3 main parts Fixed Components, Reimbursements of allowance and Statutory deductions.
A) Fixed Components
1.Basic Pay: Basic Pay is a fixed amount paid by the employer. It is paid between 30% to 40% of
Cost to company (CTC). It is a fully taxable component.
2. Dearness Allowance: Very few private companies include dearness allowance, it is mostly used by public sector and is a fully taxable income.
3. House Rent Allowance (HRA): House rent allowance is for all salaried people as per section 10 (13A) of the income Tax Act in accordance with rule 2A of Income Tax rules. HRA is claimed by the employees who stay in rented house. HRA is 40% of the basic pay if non-metros cities and 50% of basic pay if Metro cities like Delhi, Mumbai, Kolkata and Chennai.
4. Standard Deductions: As per the Union Budget 2018, there will be a standard deduction of
Rs 40,000 out of the salary. It is a non-taxable income and needs no proof. Standard deduction is a replacement for medical and conveyance allowance. This is applicable from April 2018.
5. Special allowance: In simple words special allowance consists of money which does not fit in any other component head and makes up to annual CTC. It is a fully taxable component.
B) Reimbursement of allowance 1. Leave Travel allowance: One of the cherished components of the salary structure as it is a tax
exempted component as per 10(5) of income tax act. It is given on the actual cost of the travel of the employee with or without family. Excludes the food and shopping expenses of the entire trip by road, air, railway.
2. Mobile Allowance: Mobile allowance is given by the employer to specific employees as per the
company rules (example: employees in sales & marketing). It is a fixed allowance, reimbursed against the bill.
3. Food Allowance: A claimable allowance given as a way of coupon for 2 meals day or as a wallet money up to Rs. 2,200 decided by the employer. Example: Paytm Food wallet
4. Education Allowance: Education allowance is a tax-deductible income for Rs.100 per month for maximum of 2 children
C) Statutory Deductions:
1. Provident Fund (PF): Government of India has given relaxation for registration of PF till 20 employees. Any employer with the employee base of 20 or more on payroll needs to register for EPF Scheme. The Provident fund contribution is equal for both employer and employee i.e. 12% of Basic Pay + DA. Employer contribution is always a part of employee’s CTC.
2. Professional Tax(PT): Professional Tax is levied by government for many states. It is applicable in the state of Maharashtra, Tamil Nadu, Karnataka, Bihar, West Bengal, Gujarat, Telangana, Andhra Pradesh, Assam, Meghalaya, Odisha, Tripura, Madhya Pradesh and Sikkim. The amount of Professional Tax varies from State to State.
3. Employee State Insurance Corporation (ESIC): Any employer with the employee base of more than 10 employees (in some states 20 employees) must register for ESIC having a salary of maximum gross pay of Rs.21000. Employer contribution is 4.75% of the total monthly income and employee contribution is 1.75% of the total monthly income. You can get more insights from our ESIC blog in coming week.
(Note: For reference you can follow this link. You can also add and remove allowances as per your organisation’s requirements.)Set the salaries and pay the taxes, contribute to PF and ESIC monthly. Enable employee’s faith in the organisation by setting a culture of corporate transparency. You can move up the ladder with detail incentive-based salary template for employees working under different departments like development, sales and various other verticals of the organisation.
Why are we writing this?SpiderG is a 3 years young Start-Up and has chased the ghosts of setting salaries to PF, ESIC, PT. All thanks to our great mentors, helpful legal consultants we learned to make our way. The best way to pass on the experience of making a smooth sail, is to write it down for budding friends with fabulous ideas making a way into the start-up eco-system/world.For more inputs keep reading our next blogs. Stay Tuned. Sail it through the waves, as we believe “start-up” is not just bean bags, no dress code, it’s more about your ideas, and a successful team to make it to an island.
Chief People Officer @SpiderG
SpiderG is platform for startups and SMEs to automate their bookkeeping, employee management, Collaboration Management and increase productivity.