Basic salary refers to the amount of money that an employee receives prior to any extras being added or payments deducted. It excludes bonuses, overtime pay or any other potential compensation from an employer. The whole amount of basic salary is part of the take-home salary. Basic salary is fully taxable.
Basic salary forms the core of the salary structure, constituting for 40-45% of the total CTC. Other salary components like Gratuity, Provident Fund and ESIC are determined according to the basic salary. The designation of the employee as well as the industry in which he or she is in, are some of the components factored in while assessing the basic salary.
Employers need to keep the following points in mind while deciding on how much the basic pay for an employee should be:
If basic pay is very high - In the instance that basic pay is kept very high, then the employee’s tax liability will also increase, given that this component is fully taxable. It also impacts the liability of the organization since higher contributions would be required for ESIC, PF, etc.
If basic pay is very low - In the instance that basic pay is kept very low, the organization might not be able to meet the minimum wage norms fixed by the respective state government. Also, considering that minimum wages are regularly updated, the organization could run the risk of falling below the set wage limit.
As mentioned above, the basic pay is the minimum sum of earnings that an employee is to receive. The individual may receive additional money by earning incentive bonuses or working overtime. The extra earnings made from logging in overtime does not raise the employee’s basic salary. Similarly, the monetary incentive paid out by the employer throughout the year does not impact the basic salary. Basic salary will usually be less than the gross salary.
On the other hand, gross pay includes not just the employee’s base pay, but also any additional earnings. Say, if an employee puts in extra hours or is the recipient of an incentive bonus, the additional earnings shall appear in the individual’s gross pay. It must be noted that gross salary does not include any deductions made. It is the salary paid after totalling all benefits and allowances, but before making deductions like employee provident fund (EPF) and taxes.
To sum it up, gross salary is made up of the following:
Basic Salary
Contribution to Pension/Provident fund, Group Life, etc.
House Rent Allowance, Travel Allowance, Children Education Allowance and other similar allowances
Overtime and Bonus
While basic salary does not include any of the deductions made, net pay is what an employee takes home after all the required deductions are made.
Net salary (also referred to as the Take-Home Salary) can be calculated by first adding up basic salary, HRA and allowances and then deducting income tax, EPF and professional tax from it. The net salary will be less than the gross pay on account of mandatory and voluntary payroll deductions.
What is included in basic salary?
Basic salary is a fixed amount of money that an employee receives prior to any extras being added or payments deducted. It does not include bonuses, overtime pay or any other potential compensation from an employer.
Is basic salary gross or net?
Basic salary is different from gross pay and net pay. It is a fixed amount of money that an employee receives prior to any extras being added or payments deducted. Gross pay, on the other hand, includes not just the employee’s base pay, but also any additional earnings. Net salary (also referred to as the Take Home Salary) is what an employee takes home after all the required deductions are made from the gross salary.
How DA is calculated in basic salary?
Dearness allowance (DA) is computed as a percentage of basic pay. This amount will differ depending on the location of the employee.
Is overtime pay part of basic salary?
No, extra pay for overtime work does not form part of the basic pay. It is factored in while calculating gross salary.
What is basic pay and grade pay?
Basic pay is the minimum sum of earnings that an employee stands to receive. Government employees, apart from basic pay, also receive grade pay, which is calculated depending on the category or class of the employee. The total of basic pay and grade pay is used in assessing dearness and other allowances.
How much is basic salary of CTC?
Usually, basic salary is 40% to 50% of CTC (Cost to Company). Statutory components such as bonus, PF, gratuity and other benefits are determined on the basis of the basic salary. Any increase or decrease of basic salary can affect an employee’s CTC.
Is basic salary taxable?
Yes, basic salary is fully taxable.
What are the various components found in the salary structure?
The components of the salary structure are basic salary, dearness allowance, medical allowance, conveyance allowance, HRA, leave travel allowance, children education allowance, children hostel allowance, mobile & telephone reimbursement, car maintenance, driver salary, books & periodicals and special.
What are the various deductions applicable to CTC?
Some of the common deductions applicable while determining take-home salary are Provident Fund, ESIC, Professional Tax and Labour Welfare Fund.
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