Monthly Components Guidelines Amounts (per month) Basic As per Bombay Chamber of Commerce guidelines Minimum Basic figure for skilled, semi skilled and un skilled employees should be minimum of Rs.3550 (Unskilled), 3650(Semi-Skilled) and 3750/-(Skilled). However to be on safer side, do not keep Basic figure less than Rs.3750/- p.m. Income Tax Benefit: NIL Rs.3750/- (minimum) maximum no limit.. House Rent Allowance (HRA) Maximum 50% basic (Metro cities) 40% basic (non metro cities). Income Tax Benefit: Excess of Actual rent paid over 10% of Basic salary OR Maximum HRA allowed (50% or 60% of basic) OR Actual Rent Paid – whichever is lower is Exempt from Tax. For example. Basic Rs.20000/- HRA Rs.10000/- Actual Rent Rs.8000/- Excess of actual rent paid over 10% of Basic (10%x20000 – 8000) Rs.6000 Hence max exemption allowed is lowest i.e. Rs.6000/- subject to Rent Receipts of Rs.6000/- only Maximum allowed 50% Basic (Metro Cities) OR 40% Basic (Non Metro Cities) Transport Allowance Supposed to be conveyance allowance meant for transportation between office and residence only. Income Tax Benefit: Exempt maximum up to Rs.800/- per month. No proof required. Rs.800/- (max) Children’s education allowance Income Tax Benefit: Rs.100 per child subject to max 2 children. Hence maximum Rs.200/- is exempt Rs.200/- (max) Perquisite Allowance Balancing figure – after choosing all the above components with respect to their maximum limits absorbed, remaining amount can be named as Special Allowance. It is fully taxable. Balancing Figure Medical Reimbursements Can be given against bills or without bills does not matter. Some companies give it monthly, some quarterly, half yearly or yearly also. Some companies give it only against medical bills, some do not ask for bills, rather bills are only demanded for Final Tax Computation at the end of the year. No thumb rule about it. Preferred to pay monthly, without bills and ask bills as per your wish, quarterly, half yearly or at the end of the year. Do not choose to give it against bills only, there is no rule for the same…It only makes salary processing a cumbersome process. Income Tax Benefit: Maximum Rs.1250/- p.m. (Rs.15000 p.a.) is exempt only if Original Bills are provided. Rs.1250/- (max) Food Coupons Non cash component, exempt up to Rs.1000/- p.m. Rs.1000/- (max)  RETIRALS GUIDELINES Amount (per month) Provident Fund Employer’s contribution (this is given to RPFC directly. However employee’s contribution is deducted from his Monthly salary above and sent to RPFC. Hence total deduction works out to be 12+12 = 24% of Basic. Income Tax Benefit: Employee’s contribution of 12% is eligible for Deduction from Taxable income. It can be treated as exempt investment. 12% of Basic Gratuity It is an annual component but since it is retrial benefit, it is included here. 15 days monthly basic per year. ANNUAL COMPONENTS GUIDELINES AMOUNT (per year) Leave Travel Allowance / Concession Journey within India primarily by Rail – 2nd A/c class for employee and his immediate family (spouse, children, parents, siblings). Where rail transport is not available, equivalent Public Transport like Bus is also allowed equivalent to maximum 2nd AC Rail fair only. Air transport Y class is allowed only to Central Government employees. Can be paid any time in the year in part or in full whenever the employee claims it. However employee must have proof of leaves taken for travel purpose and should be away from office for at least 2 days in a year. Income Tax Benefit: Exemption will be on Actual expenses only. Exemption is allowed only for two such journeys in the block of 4 years starting from 1986 – 89 onwards. No Limit as such… Gift Vouchers Same on the lines of food coupons, these coupon companies like Sodexho Pass also provide attractive Gift Vouchers, which can be given on Diwali Festival Occasion. For junior employees amount can be lower, for senior categories, amount can be higher up to Rs.5000 or so. Income Tax Benefit: Please check with Tax consultants how much is exempt from taxable income. As per my knowledge, it is not more than Rs.5000/- Between Rs.3000/- to Rs.5000/- For Senior Management Employees only PERQUISITES GUIDELINES AMOUNT (Per Year) Rent Free Accommodation Owned or Managed by the Employer - (Includes Flat, Hotel, Farmhouse, Guest House, Caravan, etc.) Income Tax effect: Taxable perquisite – Value of rent free accommodation considered taxable for the period of house occupied is either of the following: For Private Sector Employees 10% of Salary (for metro cities) or (7.5% for non metro cities) + Excess of Fair Rent Value (market rent) over 60% of salary (i.e. Market Rent – 60% of salary) = Total taxable value of rent-free acco. For PSU and Semi-Govt. employees 10% of Salary (for metro cities) or (7.5% for non metro cities) OR Fair Rent Value whichever is lower is  Taxable. The term ‘Salary’ will include total of the following: Basic, All Allowances & Reimbursements (excluding Med. Reimb.), Bonus received, any commission, fees etc. Fair Rent – Market Rent or Municipal Valuation of Rent, whichever is Higher. Car (For personal) Owned by the Employer Income Tax effect: Taxable Value will include the following – Actual Running & Maintenance expenditure incurred by the employer + Driver’s Salary + Depreciation – any amount charged by employer to employee for personal use of the car. Employee Stock Option Plan Employee exercises his option by buying out the shares during the exercise period however tax liability occurs only when an employee sells the shares on the value of sale made under the Capital Gains head of income. OTHER BENEFITS OUT OF CTC STRUCTURE BUT STILL FORM PART OF COMPENSATION Insurance Schemes – employees can be covered under following two schemes. The policy covers may be kept between the range of Rs.100000 to Rs.500000/- depending upon the hierarchies or grade system in your company. • Personal Accident Insurance Scheme (for employee only) • Medical Insurance Scheme (For employee & dependents which can be spouse, first two children, parents or in-laws (either of them) etc. Some companies do not cover parents/in laws, some insurance companies do. Please check this with them before taking a cover for your employees. • Maternity Benefits – Some companies have their own maternity benefit schemes for their female employees and some companies don’t have, rather the depend on Maternity Benefit Act provisions. However it is not necessary, you can choose either of the one approach. Having companies own scheme helps a lot because under the Act govt. procedures to claim benefits are always tedious one. VARIABLE PAY / PERFORMANCE PAY / Incentives etc This is not a salary. The objective of this is purely different than salary i.e. you perform; we pay you accordingly. Whereas objective of Salary is to ‘Regularly’ compensate an employee with a ‘Regular’ figure against the services extended by him towards the organization. Hence there is no Performance consideration in Salary or CTC, so there is no logic to include this in CTC structure. VP is purely performance driven and is not regular or fixed amount. Hence it should always be kept out of main Salary Structure. Although most of the companies prefer to include this figure in CTC however it gives vague and unrealistic impression of Salary. Because individual’s expectations from Salary as terminology differs than Incentives/ Variables etc Rather an independent and attractive Variable Pay or Incentive Structure can be designed and should be a part of Rewards & Awards Strategy of the organization. Following parameters can be kept in mind. It can be Random figures with broad ranges depending on the Position, Grade, Designation of the employees. For example if a company has Grades A, B, C, D, E, F then we can design incentive ranges like for Grade A, Incentives can be within the range of 0 to 100000, where Rs.0 is for poor and negative performance and 100000 is for Outstanding performers. Similarly employees falling in between can be given %ages of this range. For example after Poor ratings, you can have Average or Good or Excellent Rated employees. For them guidelines could be; this year average employees would get 30%-50% (i.e. Rs.30000/- to 50000/-) Good employees can be given between 50% to 70% (i.e. Rs.50000/- to Rs.70000/- and Excellent Rated employees can be given between 70-90% (i.e. Rs.70000 to Rs.90000/-) etc. Another approach can be percentage of CTC can be given as Incentives. It can be 10%, 20% or 30% of Monthly Salary or Basic + Allowances as the case may be. For example if you decide to keep 30% of Basic  + Allowances as Variable Pay or Performance Incentives, you can further define eligibility on the basis of performance ratings as follows. If someone’s CTC is Rs.500000/- and his Basic + Allowances comes to 375000 then his eligibility for incentives comes out to be 30%x375000=112500 i.e. the 100 % incentives for Outstanding performance. However if he performs at ‘Good’ Rating, he may be given say anywhere between 50-70% of 112500 as incentives. Note: You can also choose how you would disburse the amounts of incentives. In my opinion best will be to include incentive amount in the monthly salary of employee for next financial year…. Or some companies disburse it quarterly, half yearly or yearly on a lump sum basis. The decision can be based on your intentions whether you would like to give a lump sum big amount in the hands of an employee so that he can realize his big personal aspirations at one go, or you can choose to include this in monthly salary so that employees’ monthly income inflates regularly. A Total Compensation Structure may look like this. SALARY COMPONENT MONTHLY ANNUALLY Amount (Rs.) Amount (Rs.) Basic Rs.3500 (min) HRA 50% Basic (Metro cities) 40% Basic (Non Metro) Transport Allowance Rs.800 (max) Children’s Education Allowance Rs.200 (max) Special Allowance Balancing Figure Medical Reimbursements Rs.1250 (max) Chandra Reddy-MBA