Basic Salary

Basic Salary Meaning

A basic salary is a take-home salary or base income earned by an employee. It does not include overtime pay, commission, bonus, or any other compensation provided by the company. Basic salary is the ‘fixed amount’ paid to an employee by the employer in return for the roles and responsibilities assigned to and performed by the employee. Your gratuity, EPF, and ESIC are deducted on the basis of your basic salary. Your basic salary amount depends on your designation and the kind of industry you are working in.

Birth of ‘Salary’

Salary originates from the Latin word ‘Salarium’ that was a term given to the quota of salt given to Roman soldiers along with their pay. When the process of transporting and preserving the huge bulk of salt became cumbersome for officers, they started offering the sum of money rather than commodities. The money came to be known as salt money or salarium that turned to ‘salary’ in modern English.

In this glossary, we will cover:

1. Basic salary components
2. Basic salary calculation
3. Basic salary rule

Basic Salary Components

• Gross Salary: Amount paid to the employee including overtime pay and bonuses before tax or other deductions.
• Net Salary: Remaining salary after statutory deductions like taxes made from the gross salary. It is actually the ‘take home’ salary of an employee.
• Dearness Allowance: Component of gross salary with some fixed percentage of the basic salary, aimed at balancing the impact of inflation. It is basically a living adjustment allowance paid to an employee depending on the location in which an employee is based.
• House Rent Allowance: Component of gross salary paid to employees for meeting the accommodation expense related to renting or residential purposes. HRA is accounted for on the basis of Income Tax Act Rules.
• Conveyance Allowance: Component of gross salary offered to employees for compensation of their travel from residence to and fro from the workplace.
• Other Allowance: Component of gross salary which may include food allowance, medical reimbursements, telephone bills, etc.
• EPF Contribution: Component of gross salary contributed 12% by employees of their basic pay and 13.61% by employers in the Employer Provident Fund. Depending upon the choices of employees, they can increase their contribution of EPF to 100%.
• Professional Tax: Component of deduction amount that an employee has to mandatorily pay to the government as per the pre-defined tax slab based on their gross salary.
• Tax Deducted at Source: Component of deduction amount that is necessarily deducted to comply with income tax rules.
• Other Deductions: Component of deduction amount which might include amount related to any scheme, investment, etc.
• Cost To Company (CTC): CTC is cumulative of House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance added to the basic salary. It is basically the company’s spending on hiring and sustaining services of employees.

Basic Salary Calculation

For basic salary calculation, there is no fixed formula. It generally depends on the components of the salary structure of an employee. Usually, it comes out to be 40% of the gross pay or 50% of the CTC.

Tax Liability

Under the provisions of the Income Tax Act 1961, a specific amount of net salary must be paid to the government in the form of income tax. The amount one must pay is determined by the income tax bracket decided by the government for that financial year.

The Income Tax slab for Financial Year 2021-22 is:

Basic Salary Rule

As per the New Wage Code Rules, the basic salary of employees must be 50% of the total salary or CTC. This implies that after the implementation of the new code, the take-home salary of employees will decrease and the basic minimum salary of the employees may increase.