Basic Salary in India - Definition, Formula & Calculation

According to experts, the basic salary differs according to the type of the industry. For instance, employees in the information technology industry prefer take-home salary (since the staff turnover is high) while employees in the manufacturing companies get more fringe benefits.

How to Calculate Basic Salary?

Basic salary is used to calculate other constituents of the salary. Several components of a salary package may be calculated based on the basic salary amount (on the basis of the grade of an employee within a company’s salary structure).

It is important to note that the amount of money that an employee earns working overtime does not, in any manner, raise his or her basic pay amount. If an employee receives an incentive bonus in a year, it will not increase his or her basic salary. The basic pay, therefore, does not change, unless an employee negotiates with her or her employer.

Calculation of Basic Salary from Gross Salary with Example

Gross salary = Basic salary + HRA (House rent allowance) + DA (dearness allowance) + MA (medical allowance). On an excel sheet, the formula is =SUM(D2:G2)

Hence, the Basic Salary = Gross salary – Total Allowances (HRA, DA, Medical insurance, and others) 

Or, Basic salary = 50% of CTC or 40% of gross pay

Below is a table showing different components of a salary including CTC break-up. CTC includes both monetary and non-monetary items. All allowances and cash reimbursements are part of the package in addition to long-term and retirement benefits such as provident fund and gratuity.

Factors that Influence the Basic Salary 

The following are the factors that influences the basic salary in India: 

1. Company policies: The salary bracket is set as per the company policies and is informed accordingly to the individual during the hiring process. 
2. HR policies: An individual can receive higher compensation as per HR policies that impact on the basic salary. 

1. Location or Country: The location or the country in which the company is situated also impacts the basic salary. It varies from country to country and even between cities. 
2. Designation: An employee with a high experience level and qualifications will have a higher level in the company hierarchy and hence will have a different bracket for basic salary than someone with less experience. 
3. Industry or sector: Industry or sector also impacts on the basic salary. A renowned software company will offer a higher basic salary to their employees than a small construction firm or a small media house. 

What are the Various Components of Salary? 

The following are the different components of salary: 

1. Basic Salary: An individual’s salary constitutes 40% to 50% of basic salary which varies depending upon salary structure of the company, qualifications and experience of the employee, and other factors. 
2. Dearness allowance: Dearness Allowance is provided by the Government to the public-sector employees and pensioners to cope with the effect of inflation. This provision is added to the Income Tax Act, 1961 and declaring tax liability during filing ITR is mandatory. DA component of the salary is applicable to both employees in India and Bangladesh.The DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.
3. House Rent Allowance: HRA or House Rent Allowance is a salary component paid by employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person's salary.
   HRA is applicable to both salaried as well as self-employed individuals. HRA for salaried people is accounted for under section 10 (13A) of the Income Tax Act in accordance with rule 2A of Income Tax rules. Similarly, self-employed individuals are not considered for HRA exemption under this section but can claim tax benefits under section 80GG of the Income Tax Act.
4. Professional Tax: This is the tax levied by the state government on the income of the employees and varies from state to state. The maximum limit of professional tax that can be deducted annually is Rs.2,500. 
5. Provident Fund: This is the deduction from the employee's salary made to contribute towards provident fund contributions that help employees create wealth throughout their service period. The contribution is made both by the employee and the employer.

1. Bonus: As per the Payment of Bonus Act, 1965, the employer must provide a minimum amount of 8.33% of the basic salary to the employee as a bonus. Any establishment with more than 20 employees is liable to pay a bonus to their employees. 
2. Special Allowances: This is a sum of money paid by the employer after providing other overheads including DA, HRA, conveyance allowance, and others. This amount is paid to the employees for various reasons to fulfill the different purposes of the company. 
3. Leave Travel Allowances: This is provided by the employer to the employees for travel that covers domestic travel costs when an employee is on leave. 

Basic Salary Tax Liability

Basic salary is always taxable and should, therefore, not be more than 40% of the cost to company. However, it should also not be kept too low since it will then result in reduction in the other constituents of the salary. According to experts, employees at a junior level usually have a higher amount as basic salary compared to senior level employees. If an employee has a high basic salary, he or she will have to pay tax on it.

Difference Between Basic Salary, Gross Salary and Net Salary

Basic salary is a rate of pay agreed upon by an employer and employee and does not include overtime or any extra compensation.

Gross salary, however, is the amount paid before tax or other deductions and includes overtime pay and bonuses.

1. For instance, if an employee has a gross salary of Rs. 40,000 and a basic salary is Rs.18,000, he or she will get Rs.18,000 as fixed salary in addition to other allowances such as House rent allowance, conveyance, communication, dearness allowance, city allowance or any other special allowance.

Net salary is the amount less than gross pay. This is calculated by adding basic salary, HRA, DA, medical and other allowances and excluding all the mandatory and voluntary deductions.

How to Calculate HRA Exemption?

In the section below, the process of HRA exemption is described in detail. But before this, let us take a look at the factors that affect HRA calculation and tax exemption on it.

Factors that affect HRA Calculation :

1. Salary
2. HRA Received
3. Actual rent paid
4. City of residence (metro, non-metro or rural)

HRA Calculator

Let us take an example of Aakash who stays in Delhi and earns a salary of Rs.40,000 per month.

Aakash stays at a rented apartment for a rent of Rs.20,000 per month and is eligible for a HRA equal to 50% of the basic salary which amounts to 50% of Rs.40,000 = Rs.20,000.

Actual HRA he receives from his company is Rs.25,000

Excess of rent paid over 10% of total salary = Rs.20,000 - 10% of Rs.40,000 = Rs.20,000 – Rs.4,000 = Rs.16,000

Hence, net taxable HRA for Aakash = Rs.25,000 – Rs.16,000 = Rs.9,000

Here the value of net taxable HRA is Rs.9000 because of the following reason.

What is Added to the Basic Salary? 

The following are the components that are added to the basic salary of the employee by the employer: 

1. Dearness Allowance 
2. House Rent Allowance 
3. Gratuity 
4. Medical Insurance 
5. Bonus 

1. Internet and mobile bill reimbursements 
2. Overtime funds 

PF Contribution Limit

Employees’ Provident Fund is a retirement investment plan that every salaried individual opts for. Here are the following points to remember about Provident Fund contribution:

1. Employees usually contribute 12% of their basic pay
2. The employer contributes 13.61% towards the Employee Provident Fund.
3. If the employees wish, they can contribute more than 12% of the basic pay
4. The contribution can be increased to 100% as per the convivence of the employee
5. The employer contribution to PF remains fixed

From 1st September 2014, the EPFO has revised the basic wage limit on which PF contribution will be done from Rs.6500 to Rs.15000. Employers have to revise the PF deductions from September 2014 onward for all employees whose basic salary is less than or equal to Rs.15000.

Cost To Company - CTC

Cost to Company or CTC as it is commonly called, is the cost a company incurs when hiring an employee. It is a variable pay and depends upon different factors. Here are some of the key points to remember about CTC:

1. CTC is a cumulative of various elements such as House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance.
2. CTC also included allowances such as office space rent, cab service, subsidized loan, Sodexo meal coupons, and others

1. The take home salary or net salary varies depending upon the CTC
2. Annual appraisal and increments are decided depending upon the CTC
3. CTC components varies depending upon the employer.