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Basic Salary Calculation, Salary Deduction, Formulas

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Your take-home salary is the sum total of your basic salary, deductions made, additional allowances, and so on. Gross Salary, CTC-Cumulative Cost to Company, and Net Salary are all terms linked with your salary. Hence it is necessary to understand these terms and how they impact you. Let’s begin with your salary’s foundation or the Basic Salary. Let’s answer some important questions like what is base salary in India? And let’s see how salary is calculated in India.

What is Basic Salary?

Minimum Basic Salary is the fixed portion of your salary before the addition of allowances like DA (Dearness Allowance), HRA (House Rent Allowance), Overtime, Bonus, etc, or deductions like Employee Contribution to Provident Fund, Gratuity etc. 

It is a part of your total CTC (Basic salary percentage = 40 to 50% of the total salary) and take-home salary. Expenses like phone, travel, internet usage etc., especially for the work-from-home employees are added on to their basic pay.

How to Calculate Basic Salary?

Thus your basic pay is the most important part of your salary structure based on which other salary elements like gratuity, PF etc., are calculated. 

  • So, your annual basic pay calculation is:

Annual Basic Salary = Monthly Basic Salary X 12 months.

  • Though there is no fixed way your basic salary is decided, it is generally calculated using a reversed calculation method by taking a percentage of your gross salary and CTC into consideration. Basic pay is normally 50% of your CTC or 40% of your Gross Pay.
  • Another way of looking at this is

Basic salary/pay = Gross Pay-(sum total of allowances like DA, HRA, Conveyance, Medical insurance etc)

  • It can also be calculated as 

Basic pay/salary = A percentage of the Gross Pay or percentage of the CTC

Consider these examples on how to calculate basic pay

  1. Assume that Raj’s Gross Pay is Rs. 45,000. From the above formulas, basic salary is generally 40% of Gross Pay or Rs. 18,000. 
  2. If Rashi’s CTC is 60,000 and if we use the CTC percentage then her basic salary amounts to 50 % of the CTC or Rs 30,000. Thus her basic salary is Rs 30,000.

Also Read: How To Generate Form 16 A For Payments Other Than Salary

Factors Affecting The Salary Calculation Formula

Salary calculation formulas depend on several factors such as:

  • Country: Based on economic and social factors, salary brackets can be different in each country. Hence, the basic salaries in India will be different from the basic salaries in, let’s say, the USA.
  • Company: Most companies have pre-decided salary brackets. These are decided based on factors like company turnover, product, and demand and supply, among others. For example, the basic salary offered by leading companies like Infosys in the software segment is going to be different from the basic salary offered by a startup in the same software segment.
  • Industry: Basic salaries in various industries are different. The base salary in India in the media sector (news channels) is different from the basic salary in the construction business.
  • Company HR Policies: The HR policies of the company also impact the basic salary. If the employee is considered a valuable asset to the company, the basic salary can be much higher than others at the same level.
  • Employee Designation: Your basic salary calculation depends on your designation too. For example, the basic salary of a software developer is different from the basic salary of a Sales Manager in the same company.

Gross Pay Calculation from the Basic Pay

First, let’s define gross salary and basic salary. The gross salary formula depends on the basic pay. It is generally the sum of your basic pay plus allowances before any deductions. From the above discussion, basic pay meaning stands at – the fixed portion of your monthly salary before any additions or deductions.

  • Thus an employee’s Gross Pay is:

Gross Pay = Basic pay HRA, DA, Medical, Conveyance, and Other allowances

  • If the gross pay is given, it is easy to calculate the basic salary. You can use the below formula:

Basic salary = Gross salary – HRA – DA – Medical – Conveyance – Other allowances

  • If your employment contract mentions a percentage of the gross pay as the basic salary, the formula for calculation of the basic salary is as below.

Basic pay = Percentage mentioned X Gross Pay

  • In the example of Raj mentioned above, assume that Raj’s Gross Pay is Rs. 45,000. From the above formulas, the basic salary is generally 40% of the Gross Pay or Rs. 18,000. 
  • Raj’s take-home salary can also be calculated by making the necessary deductions from the gross pay. Take-Home salary is equal to Gross Pay minus all deductions or 

Take-Home Salary = Gross Pay- Deductions like Contribution to Pension, Pay Reduction Due to Strikes, TDS, Insurance Premiums, Court Order Payments etc.

You can easily calculate your take-home salary with the online Excel Salary Sheet Templates. This has columns for additions and deductions, making the calculation easier than before.

Additions to Basic Salary

Some of the common additions to Basic Salary are

  1. Bonus
  2. Overtime
  3. Tips
  4. Gratuity
  5. DA
  6. HRA
  7. Conveyance
  8. Medical allowances
  9. Other allowances like internet, phone usage etc

Basic Salary Deductions

Below are some common deductions you may find on a salary slip

  1. Pension contributions.
  2. Court Order Payments 
  3. Contribution to Salary Sacrifice Schemes
  4. Pay Reduction Due to Strikes
  5. TDS or Tax Deducted at Source.
  6. Group insurance policy premiums.

Also Read: How to Save Income Tax on Income from Salary for Individuals

Applicability of Income Tax

As per the Income Tax Act, Income Tax is charged on your total take-home salary, not just your basic salary. Thus your basic salary is taxable, which is why companies do not keep a basic salary higher than 40 to 50% of the total cost to the company or CTC. 

What Are The Different Components Of Your Salary?

Your offer letter or appointment letter usually has an additional sheet on your salary break-up that shows all the different components of your salary. The most common components in your salary are listed below:

  • Basic Salary: It is usually the biggest chunk of your salary. It is normally 40-50 per cent of your total salary. There is no set basis for this amount. However, factors like experience, skills, qualification can affect the amount of your basic pay. It is always a part of the CTC or Cost-To-Company.
  • Bonus: Many companies pay performance incentives called the annual bonus to their employees. It is usually a percentage of the Basic Salary. It is a fully taxable component of the salary.
  • DA- Dearness Allowance: This is calculated as a percentage of the basic salary. Usually, metro cities have higher percentages of DA than smaller cities and towns.
  • HRA- House Rent Allowance: HRA is a component of your gross salary. It is a percentage of your base salary paid by your company for your accommodation. The IT Act specifies various tax exemptions on HRA, depending on whether your home is rented or self-owned.
  • Special Allowances: Several salary components like entertainment allowance, allowances for reimbursement of phone, internet etc, known as special allowances in the Gross Salary are fully taxable.
  • Professional Tax: This state government tax is charged annually with a maximum cap of Rs 2,500 during any given financial year.
  • LTA- Leave Travel Allowance: This annual allowance is given by the company to cover travel expenses for you and sometimes your family. Employees need to submit proof of travel and money spent (receipts) to claim the allowance. IT exemptions for LTA are mentioned in U/S 10(5) of the IT Act.
  • Provident fund employee contribution: 12% of your basic salary goes to your Employee Provident Fund – EPF every month. Your company jointly deposits an equal amount to your EPF and pension fund. This component is available as a deduction under Income Tax Act, 1961 U/S 80C.

Also Read: PF Calculator – Calculate EPF Online

Effects of a lower Basic Salary

There are both pros and cons of lower Basic Salaries. All your allowances are based on basic salary. This low basic pay will result in lower allowances and a low gross and take-home salary. However, it also means less tax payment.

Lower basic pay pros

  • Lesser Tax 
  • The savings potential is higher.
  • The Employee State Insurance Corporation (ESIC) or Provident Fund (PF) Contribution Amount is lesser, which means more cash in hand.

Lower basic pay cons

  • The end-of-service gratuity and benefits are lesser.
  • Dearness Allowances are lower.
  • The bonus component is also lesser.

Conclusion

Nearly all employees have questions about CTC, salary calculations, income tax calculations, basic salary, gross, and net salaries. Today one can easily calculate these using top-rated apps like the Legaltree app. Try it today to understand your salary better.

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