Understanding Payroll Structure in India

A payroll structure covers all details of the compensation offered to an employee with a complete break-up of the components. Any change to this payroll structure has a major effect on the tax exemptions that can be claimed by the employee. 

Every HR or payroll department in an organization is always tasked with creating a solid pay structure for the employees. It is important to have an understanding of what constitutes the salary earned. This is especially necessary to make well-informed decisions on savings, investments or tax exemptions that can be claimed. 

The payroll structure of a company is categorised under three main heads:

1. Net salary: the take-home amount after the deductions. The deductions in the Indian payroll system can include elements like Provident Fund (PF), Employees’ State Insurance (ESI), Labour Welfare Fund, National Pension Scheme (NPS), Professional Tax, etc.

2. Gross salary: this will be the employee’s total earnings without deductions and what will be shown on the payslip. Elements like the basic salary, allowances, and tax are added up to get the gross salary. It includes overtime pay, bonuses, holiday pay and more.

3. CTC or Cost to the Company: the total monetary benefits that the employer gives to the employee for the whole financial year. CTC is the full salary package of the employee and not the take-home salary. It comprises all monthly additives like “Basic Salary,” “Perquisites,” and “Allowances”.

Fixed & Variable Pay in Payroll Structure

The salary structure of an employee can have both fixed and variable elements. Fixed pay is what is paid to the employee by the employer in the form of a fixed monthly salary. This is the accrual salary that is shown in the salary slip with basic and multiple allowances. The variable pay or the extra incentives is not given on a monthly basis.

All companies have different policies for this. Fixed pay could include basic pay, dearness allowance (DA), house rent allowance (HRA), conveyance allowance, other special allowances, etc. Whereas the variable pay is paid out based on employee or company performance like when the company meets revenue targets or as a commission of sales achieved by the employee.

Different Types of Payroll Structure

Companies have the freedom to choose the best salary structure that is ideal for them. This is dependent on factors like industry type, business size, or even business location. The three types used are traditional, broadband and market-based. The most commonly used type is market-based structure.

In the traditional structure, the salary is divided into many pay grades with a maximum and minimum salary range set for each employee group. Key metrics like performance or employment tenure can be used to fix a pay hike. The more flexible broadband structure uses lesser pay grades so the salary range can get higher. Due to the possible instances of pay disparities this salary structure type is not very popular among companies.

The market-based salary structure is almost like a combination of traditional and broadband structures but the pay is determined based on the market range for each position. Market data is collected with some research on what other similar companies are paying their employees.

Different Components of Payroll Structure

Basic Salary

This is the taxable base income of an employee based on the designation and industry they work in. It ideally constitutes 35% to 50% of the total salary.

Allowances

Fully or partly taxable amount paid to the employee as part of their regular duty like Dearness Allowance, Travel Allowance, House Rent Allowance, Conveyance Allowance, Medical Allowance or Leave Travel Allowance.

Gratuity

An essential lump sum benefit payable by the employer after completion of 5 years or more of service.

Provident Fund (PF)

Based on the employee benefits scheme of the payroll salary structure in India PF includes investments made by both employee and employer.

Professional Tax

It is an amount deducted from the income of salaried people, and it is paid to the state government. 

Perquisites

Non-cash benefits, such as Profit sharing, Stock options, Fringe benefits, etc. are enjoyed by some employees based on their position in the company.

Reimbursements

This includes the various types of reimbursements that employees are offered like phone bills, medical treatments, office stationery and newspaper bills, etc. It is not included in the pay but reimbursed after bills are submitted by an employee.

Employees’ State Insurance Corporation (ESIC)

A state insurance scheme is required to be availed by the company if there are 10 or more employees.

Factors to Consider for Payroll Structure

The payroll structure should always be aligned with the vision and goals of the business. An optimised payroll structure can go a long way in unlocking the overall effectiveness of the reward strategies the company has in place.

There must be an ideal balance between the internal and external market in the company’s overall pay structure. If a company is consistently behind in the external market with respect to pay scales, then this needs to be addressed. Whereas if some companies are regularly considered paymasters or employers of choice, the base salary is not always driven by the external market data.

Identifying job families based on your company’s reward strategy can help ensure that the payroll structure differentiates pay premiums for certain skill sets or business-critical areas. This helps greatly when it comes to attracting and retaining the best talent. Also, consider the pay grade width you want to follow for each grade level of employees. Wider grades can give you more flexibility in managing pay and reduced implementation costs as well. 

Statutory Compliance of India Payroll

Before handing out the offer letter to a newly appointed candidate, employers must make sure that the salary structure includes all the important components. It is extremely crucial to maintain a payroll structure that has statutory compliance. 

All the labor and taxation laws of the state come under statutory compliance and so does the payroll structure. In India, every company has to mandatorily endure both national and state-level laws. Companies dealing with statutory compliance need to be well-versed with the various labor regulations in India.

Outsourcing Payroll Functions

Creating a salary structure that offers both financial and tax benefits is the key to successful payroll processing and reporting. Outsourcing the key payroll processing functions to experts like Alp Consulting ensures:

• Every payroll structure challenge is handled professionally with zero error 
• Reduced payroll processing costs
• Better compliance with rules and regulations
• Minimal risk of fraud or data leakage
• Lower possibility of errors

Effective from 1^st July 2022, the government has introduced some revisions to the basic salary and allowances. As per the new guidelines, the allowances will be capped to a maximum of 50% of the overall package. This rule is set to change the salary component calculation in India. 

With the employer’s contribution to PF increasing, the take-home salary is likely to come down. When you decide to go with payroll experts, they can make sure that new regulations like these are followed when creating a salary structure.

Frequently Asked Questions

How is the payroll structure created?

Before creating a salary structure consider defining the value of every position in your company, analyze your company’s competitive standing and also predefine a salary increase rate when compared to market rates. Develop a pay structure based on the info gathered from the market analysis of salary ranges.

What are the components of the payroll structure?

The major components of a payroll structure ideally include gross salary, deductions, provident fund, professional tax, employee state insurance corporation and labor welfare fund.

What are the three types of salary structures?

The three types of salary structures are traditional, broadband and market-based. The most commonly used of the lot is the market-based structure and broadband is the least used.

What constitutes salary in Indian payroll processing?

The two main components that constitute salary in Indian payroll processing are fixed and dynamic or variable. The fixed changes are only on annual revision or based on performance. The dynamic pay is what gets paid on a quarterly, half-yearly or annually depending on the overall company or department performance.

What are the types of payroll systems?

The three types of payroll systems are manual, in-house computerized and outsourced systems.

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