What is Salary Breakup?
Salary breakup refers to a detailed bifurcation of an employee’s cumulative compensation into multiple components including basic salary, house rent allowance, bonuses, provident fund contribution, etc. The total of all components will be called as your gross salary, while post deductions calculation will be your monthly in-hand salary.
In simpler terms, a salary structure can be classified as a division of the money earned. Total salary vs what exactly you earn, what will be saved, what becomes taxable, and what the deductions would be. Understanding your salary breakup becomes highly necessary as it provides a clear overview of tax liabilities, possible deductions, savings, investments, and any sort of monthly or upcoming expenses.
Read More: Everything You Need to Know About Payroll
What are the Components of Salary Breakup Structure?
The foundation of salary breakup structure constitutes multiple elements/components that collectively drafts employees’ salary. These components can be categorized in certain groups, such as earnings, benefits, and possible deductions. Listed below is a detailed overview of each component-
Basic Salary
Basic salary is the fixed and foundational part in the payroll structure of an employee’s compensation; it usually constitutes 30-50% of the entire CTC. Coming under the taxable slab, this component is utilized for calculating all other salary aspects such as HRA, provident fund, gratuity, and employee bonuses. Higher the basic salary, higher would be the statutory benefits and equally increased taxes and PF deductions.
Allowances
Allowances are the additional payment benefits allocated to an employee as a part of remuneration. The common allowances include house rent allowance, dearness allowance for meeting inflation, conveyance allowance to compensate for travel, leave travel allowance allocated for traveling expenses, and special allowance- a flexible remuneration provided on basis of multiple factors in an organization. However, not all allowances are tax free; some might come under tax slab basis specific conditions.
Variable Pay/ Yearly Incentives
Variable pay is generally a performance-based bonus amount which is paid periodically. This can be individual pay; team pay or can be based on organization’s performance. This particular pay might include bonuses, commissions, or productivity incentives. This particularly motivates employees to target high, achieve higher, and sync employee performance with organization's long-term goals and strategies.
Employer Contributions
These contributions constitute perks that are provided by the employer. Many under this are generic but mandatory contributions like provident funds, gratuity, and employee state insurance. However, these are generally included in the CTC; these aren’t received as cash amount but are instead deposited in a lock-in government account which provides long-term financial security and multiple other social advantages.
Sundry Benefits
These are non-cash benefits which are provided by the employer including health insurance, Sodexo vouchers, and company-funded cars. Mobile bill reimbursement, or even funds for housing. A few of the above listed benefits are tax exempted, making them a great option and significant value addition to overall CTC/ salary calculation.
How is Salary Structure Determined?
Employee's salary structure is determined through smartly balancing business affordability, understanding the competition in the market, adhering to legal compliance, and entrusting employee value at the same time. Below mentioned are few steps how organizations decide the structure-
Market & Industry Benchmarking
In a typical process, organizations analyze employee’ salary surveys through a competitor analysis that speaks of clarity and smart insights. This ensures that the right salary is being offered to the employee, basis the market standards in the cutting-edge competition. It should always be as per the general market standards but shouldn’t overlook employee skills and organizational requirements.
Job Evaluation & Role Complexity
Every role is assessed based on factors like responsibilities, major skills, employee experience, and the kind of impact on the final business outcomes. The positions with high accountability, better technical expertise, or leadership roles are generally eligible for higher pay and have bands that are equally higher.
Company Budget & Compensation Strategy
Different organizations have different pay strategies for compensation. It might be aiming to match the market standards, top the charts, or simply draft a plan as per the long-term budgeting. Once finalized, the salary structure is specifically designed within preset financial limits in order to maintain sustainable payroll efficiency.
Legal & Statutory Compliance
Employee salaries are structured in a way that adheres to region-based labor laws like minimum wages, provident fund, ESI, professional taxation, income tax regulations, and gratuity calculation. This ensures that legalities are well maintained, safety stays intact, and employees are eligible for the required benefits.
Read Here: Payroll Compliance in India - The Complete Guide 2026
Internal Equity & Tax Optimization
Organizations ensure a policy of fair compensation is implemented across multiple roles while structuring the salary components such as basic salary, HRA, allowances, bonuses etc. This elevates tax efficiency for employees and manage cost spent by the employer much more effectively.
How is Salary Breakup Calculation Implemented?
Implementing salary breakup calculation requires a streamlined process that filters and differentiates each component from the total CTC into structured pay components. Here are the steps involved in the process-
Defining Total CTC
The process kickstarts with offering a cumulative CTC to an employee including various components such as fixed salary, variable component, incentives or bonuses, employer statutory contributions and any other employee benefits provided by the organization.
Calculating Basic Salary
This is the next part where basic salary is being calculated, which is usually set around 30-50% of CTC. Here many employer contributions are included as provident fund and gratuity, as a part of basic salary.
Add Allowances & Benefits
The rest of the salary is distributed across other components including HRA, special allowances, travel allowance, medical allowance, and other major benefits. These allowances and benefits are structured to balance an employee’s in-hand salary and tax deductions.
Statutory Deductions
There are some mandatory deductions such as PF, tax, income tax (TDS) etc. These are calculated basis on applicable geography-based laws. Here employer contributions are added in the CTC, and employee contributions are removed from the gross salary.
Determining Take-Home Salary
After removing the statutory deductions and taxations from the final gross amount, the total amount payable to the employee every month is calculated as the net in-hand compensation.
Explain with a Salary Breakup Calculation Example
Here's a brief example of calculating salary breakup-
Imagine an employee is being offered a CTC of 6LPA, listed below will be the components included-
- Basic Salary - 40% CTC - 2,40,000 per year, 20,000 monthly.
- House Rent Allowance - 96,000 annually, 8,000 monthly.
- Special Allowances- 1,90,200 per year, 15,850 monthly.
- Conveyance Allowance- 19,200 per year, 1.600 monthly.
- Medical Allowance - 15,600 per year, 1,300 monthly.
- PF- 28,000 per year, 2,400 monthly.
- Gratuity- 11,544 per year, 962 monthly.
Gross Salary- Basic+ HRA+ Allowances
20,000 + 8,000 + 15,850 + 1,600 + 1,300 = 46,750 per month
Employee Deductions (Monthly)
In-Hand Salary (Monthly)
Gross Salary - Deductions
46,750 – 3,800 = 42,950 per month
Conclusion
Understanding salary breakup and its calculations is imperative not just for employers but employees also. A well-structured salary breakup makes it precise and clear for the employees about their monthly take home amount and the other benefits included in the structure. On the other hand, it becomes easier for organizations to adhere to legal compliance and manage their budgeting accordingly.
While you might find manual calculation confusing and prone to error, getting started with a Payroll software that can automate each aspect and provide AI-based suggestions can improve and manage the process. Choose HONO, talk to the team of professionals to help you find the best solution for your salary calculation related issues.
.svg)
.jpg)
