Compensation professionals that have never dealt with India before are often very confused with the compensation system ---- even very experienced professionals. The reason for the complexity is the multiple compensation components driven by the India income tax code of complicated tax exemptions and deductions. Regardless of "why" ---- India's compensation system is probably the most unique of any country in the world.
India uses the term “cost to company” or CTC. Simply speaking, CTC is the amount that a company spends --- directly or indirectly --- because of employing a person.
The amount of basic salary --- the “in-hand” component --- can be as low as 30% of CTC or as high as 80%, depending on the company. It can also depend on whether the company is situated in an urban or rural setting. In most multinationals “in-hand” pay is 40-50% of CTC.
The components of “in-hand” pay vary but here is a typical example:
Basic ---- The basic salary. It is paid out every month and is taxable
Dearness Allowance (DA) --- It compensates for increases in the cost of living due to inflation and is taxable.
Incentives/bonuses ---- Paid out depending on employee performance. Paid out monthly and fully taxable.
Conveyance allowance ---- Paid out to meet expenses on commuter related transportation. It is paid out monthly. Up to Rs 800 per month is tax-free. Any amount over that is taxable.
House Rent Allowance (HRA) ---- HRA is paid out to meet full or part of an expenditure on renting a house. It is usually expressed as a percentage of basic. It is paid out monthly and can be tax-free depending on certain conditions.
Medical allowance ---- Medical allowance is paid out to help with the amount that is spent on medical treatment and medicines. It is paid out monthly. An alternative is if the employee presents his/her employer with actual receipts for medical care. In this case they are paid in full by the company, tax-free up to Rs 15,000 per year.
Leave Travel Allowance of Concession (LTA/LTC) ---- LTA is paid to encourage periodic vacations. It is paid out once a year and can be tax-free provided certain conditions are met.
Vehicle Allowance --- This is given to maintain a car. It is paid out monthly and is taxable.
Telephone/Mobile Phone Allowance --- It is given to maintain a landline or cell phone. It is paid out monthly and is taxable.
Special Allowance ---- As if all the above is not enough, this allowance can be given out to pay money that doesn’t fit into any other category. This allowance is paid out monthly and is taxable.
There are other “in-hand” salary components included by companies, but the above are the most typical. The most unusual allowance I have seen is "briefcase allowance"!
The employment contract of a new employee shows CTC in a monthly amount with "in-hand" compensation provided as a percentage of CTC.
Let’s see an example explaining the salary.
Component of Salary (per annum) |
Amount |
Basic Salary |
480,000 |
Dearness Allowance |
48,000 |
House Rent Allowance |
96,000 |
Conveyance Allowance |
12,000 |
Entertainment Allowance |
12,000 |
Overtime Allowance |
12,000 |
Medical Reimbursements |
15,000 |
Gross Salary |
6,75,000 |
Benefits vary from company to company. Example of benefits for the above employee are:
Medical insurance |
2000 |
Provident Fund (12% of Basic) |
57,600 (12% of 4,80,000) |
Laptop |
50,000 |
Total Benefits |
109600 |
Cost to Company=Gross Salary + Benefits |
6,75,000 + 109600=7,84,600 |
How tax affects the various components of salary:
Component of Salary(per annum) |
Amount |
Tax |
Taxable Amount |
Basic Salary |
480,000 |
Full amount is taxable |
480,000 |
Dearness Allowance |
48,000 |
Depends on company policy. Mostly taxable. |
48,000 |
House Rent Allowance |
96,000 |
Applicable if living in a rented house. |
52,800 |
Conveyance Allowance |
12,000 |
Conveyance allowance of Rs 9,600 per annum is exempted from tax. If salary component is more than 9,600, the remaining part is taxable.In this case:12,000-9600=2400 |
2,400 |
Entertainment Allowance |
12,000 |
Depends on company policy. Mostly taxable. |
12,000 |
Overtime Allowance |
12,000 |
Fully taxable |
12,000 |
Medical Reimbursements |
15,000 |
If substantiated with bills, are exempt to a limit of Rs 15,000 annually |
0 |
Gross Salary |
6,75,000 |
Gross Taxable Salary |
6,07,200 |
Is your head spinning? When participating in compensation surveys, exercise extreme caution in matching the various components. When in doubt --- ask the advice of the survey provider.
Has anyone had a different experience in dealing with India's compensation system?
Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career. Her true love is working with local national issues. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA. She belongs to SHRM, Human Capital Institute and World at Work. Jacque has also been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications. She lives in Dallas and has 3 four-legged children and one Chinese daughter (it’s a long story). She’s had a life-long love of animals and the ocean. So why is she living in Dallas?
Image courtesy: http://timesofindia.indiatimes.com/
What a wonderfully concise view of Indian compensation, Jacque. I've had several clients with operations there, and it's always difficult to explain Indian methodology, especially the CTC. This article is a "keeper" for my files.'
Btw, two small considerations; I thought that the Dearness Allowance (DA) was restricted to certain groups and not in as much use anymore. Also, several components can be highly negotiable and dependent on an individual's own circumstances - especially the Special Allowance, which acts as a sort of "wallpaper" to cover over cracks in the employment package.
Well done.
Posted by: Chuck Csizmar | 09/11/2012 at 02:27 AM
Great Information Jacque,
Having worked in Indian Compensation system for a few years, I do agree that it involves a lot of factors and that can create a lot of confusion for someone who has not dealt with that system yet.
Great details. And there is one more benefit that employee gets apart from the Provident Fund is his Gratuity. Anyone who works with the same company for more than five years is eligible to receive gratuity amount asper the Payment of Gratuity Act, 1971.
The amount will be calculated as follows:
Gratuity = Monthly Salary x 15 days x No. of yrs. of service
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Max. Gratuity payable under the Act is Rs. 3,50,000/- (w.e.f. 24-9-1997)
Only the basic pay and dearness allowance is considered while accounting for the last drawn monthly salary. For computation of gratuity, your service period will be rounded off to a year. So if the actual figure is 14 years and 7 months, it will be considered as 15 years. The gratuity received under the Act is tax-free to the extent that it does not exceed 15 days’ salary for every completed year of service. This is subject to a maximum of Rs 3.5 lakh. This tax-free ceiling applies to the aggregate of gratuity received from one or more employers in the same year or during different years.
Applies to:
1. Every factory, mine, oil-field, plantation, port and railway company;
2. Shops or establishment with ten or more persons employed on any day in the preceding 12 months;
3. Such Shops or establishment with ten or more persons employed on any day in the preceding 12 months as identified by Central Government by notification;
Applies to the whole of India except to Jammu & Kashmir in so far as to plantations or ports.
A attached for more information.
http://www.lawnotes.in/Payment_of_Gratuity_Act,_1972
Thanks,
Nisha Raghavan-Your HR Buddy!!
Posted by: Nisha raghavan (@TheHrbuddy) | 09/11/2012 at 10:38 AM
Thank you both for your comments.
Nisha you are correct and that was gratuity was one I missed.
Chuck --- yes Indians are quite the negotiators! It is difficult to keep up-to-date on all the components as with tax laws changing some components are changing as well. I was told almost 10 years ago that we would see comp packages drastically changing due to big changes in tax law. Well it seems that instead of of changing the laws all at one time, they are have been changing gradually. Does that sound familiar???
Posted by: Jacque Vilet | 09/11/2012 at 11:28 AM
Rightly pointed it out Jacque,
I have done a study after reading your comment. I found quiet a bit changes! And these are the few latest amendments in the Indian labor laws:
1) As per Employee State Insurance Act the wage ceiling has been increased from Rs.10,000/- to Rs.15,000/- with effect from 01.05.2010
2) Maximum amount payable has been increased from Rs.3,50,000/ to Rs.10,00,000/- as per The Payment of Gratuity Act 1972 effective from 24.05.2010
3) Enhancement in minimum compensation payable from Rs.80,000 to Rs.1,20,000 (in case of death) and from Rs.90,000 to Rs.1,40,000 (in case of permanent disability) and funeral expenses from Rs.2,500 to Rs.5,000. As per The workmen's Compensation Act (effective from 18.01.2010)
4) The Maternity Benefit Act, 1961 amended to enhance the medical bonus from Rs. 250/- to Rs. 2,500/-and also empowering the Central Government to increase it from time to time before every three years, by way of notification in the Official Gazette, subject to a maximum of Rs. 20,000/-.
5) The Payment of Bonus Act, 1965 amended to enhance the eligibility limit from Rs. 3,500/- per month to Rs. 10,000/- and calculation ceiling from Rs. 2,500 to Rs. 3,500/- per month while making employees employed through contractors on building operations eligible for payment of bonus under the Act.
As you said we need to keep up-to-date on all the components. And I must say before taking any final take on any laws its better to have a recheck again:)
Thanks
Nisha Raghavan-Your HR Buddy!!
Posted by: Nisha raghavan (@TheHrbuddy) | 09/11/2012 at 11:36 PM
Thank you Nisha. Difficult to be an "expert" from one day to the next! Thank you for the additional information.
Posted by: Jacque Vilet | 09/12/2012 at 10:14 AM
http://www.worldatwork.org/waw/community/discussions/discuss.jsp?did=23432&tid=23432&frm=sr contains another but older and broader list of pay elements found in India. Some, of course, may be out of date.
The most frequently encountered issue I've experienced has been the traditional expatriate Indian focus on net versus gross compensation for comparative purposes. Mutual misunderstandings typically complicate that topic.
Posted by: E. James (Jim) Brennan | 09/12/2012 at 03:40 PM
Hi Jim --- not sure what you mean by expatriate focus as this article applies to locals.
Your talk about gross vs net pay ---- there are some countries where you don't say "pay" in an employment contract. "Pay" means gross to Westerners but in certain countries it means "net". Tends to happen when taxes are high --- employees are most interested in the amount of pay in their pocket.
Posted by: Jacque Vilet | 09/12/2012 at 04:07 PM
All --- here is a statement in Jim's World at Work reference above.
" Central Board of Direct Taxes has a plan in place to do away with the multitude of benefits to each of these allowances/benefits."
The date of that article was 2010. I've been hearing the same thing for 10 years!
Things work slow in India! I'm not sure they will switch to a "normal" compensation structure if tax laws do change. Some things die a slow death.
Posted by: Jacque Vilet | 09/12/2012 at 04:13 PM
Due to special considerations in Indian tax law, those working on H-1B visas or other temporary contact assignments in the US tend to inquire about the net pay amount instead of the gross figure the American employers cite as their base. Pay in India to local nationals (as covered in my references) is subject to choices and options about their compensation that are completely foreign (sic) to Americans. Thus, they raise questions that puzzle Yanks when they come over here to work.
Posted by: E. James (Jim) Brennan | 09/13/2012 at 10:12 PM