What does basic salary mean?
In simple terms basic salary is the fixed part of the entire CTC (cost to company) that an employee earns. This amount is calculated over and above the additional benefits, bonuses or any other deductions included. Basic salary is considered as the core component of employee’s total remuneration and do
What are the components of basic salary?
Basic salary is the fixed amount in the pay structure of an employee; it constitutes of the following components-
- Fixed pay- It is the core amount which was agreed upon in the employment contract.
- PF Contribution- Provident fund contribution is a percentage which is deducted from the basic salary as the retirement savings.
- Gratuity- This is the amount which is generally given after completing a certain tenure at the company.
Differentiate between Base Salary, Gross Pay, and Net Pay
Here's the difference between the three different components of employee’s pay structure or CTC.
- Base Salary- This is the fixed amount of an employee’s pay structure excluding bonuses, allowances, deductions etc. This can also be used as a salary structure foundation for calculating other components like HRA, PF and gratuity.
- Gross Pay- This component includes the base salary with all additional earnings including bonus, allowances, commissions, overtime etc. It signifies total earning without any deductions or without tax and PF deduction.
- Net Pay- This is the final take home pay which an employee receives after all possible deductions in their salary. The deductibles include tax, provident fund, health insurance or any agreed deduction as per the company policy. In simpler terms, net pay is the amount which is transferred to employee’s bank account after a month of working.
How is basic salary determined?
Basic salary is determined through multiple factors that are directly in sync with the company’s policies or industry standards which are already agreed initially. Listed below are the components which set up the basic salary-
- Roles & Responsibilities- Mostly the salary structure depends upon the nature of the job, the kind of skills, designation, level of responsibility and accountability. This is the reason why you see the people at senior positions and complex work structure demand greater salaries.
- Qualifications and Work Experience- Salaries are determined on basis of the level of qualification and the years of experience a person is having in the similar field. Candidates with higher education from renowned institutes and the ones with good experience always ask for higher salaries.
- Industry Standards- Companies generally follow a common industry standard of providing salary hikes and offering CTC during the time of joining.
- Location and Cost of Living- This is often seen that people living in tier 1 cities are more likely to get better remuneration as the cost of living are higher in comparison to tier 2 or 3 cities.
How to calculate basic salary?
Basic salary can be calculated either from the gross pay or as a part of the CTC structure.
- From Gross Salary- The formula for calculating basic salary is- Basic Salary = Gross Salary Multiplied by Basic Salary %
- If calculated through CTC, deduct all the allowances, bonuses and employer contribution such as PF or gratuity from the total amount. The outcome will be the basic salary.
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