Basic Salary

Salaried workers receive the same fractional amount of their annual basic salary every payday. To determine the amount, the annual basic salary is divided by the number of pay periods in a year at that company. For example, if the company pays workers once each month, there will be 12 paydays in a year and the employee will receive one-twelfth of their annual basic salary on each payday.

Employees who are paid a basic salary receive a fixed amount each month regardless of how many hours they work. In contrast, employees who receive hourly pay are compensated for the number of hours they work. Unlike most salaried workers, hourly workers are generally also entitled to overtime pay if they work more than 40 hours in a week.

The applicable deductions and additions to the basic salary are listed below:

Given that it is the base income, 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.   

Following is the depiction of 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.

Basic salary is always taxable and should, therefore, not be more than 40% of the CTC.  However, it should also not be kept too low since it will then result in reduction in the other constituents of the salary. Employees at a junior level or freshers usually have a higher amount as basic salary compared to senior level employees. 

What if the basic pay is very high?

In the instance that basic pay is kept very high, then the employee’s tax liability will also increase, given that this component is fully taxable. It also impacts the liability of the organization since higher contributions would be required for ESIC, PF, etc.

What if the basic pay is very low?

In the instance that basic pay is kept very low, the organization might not be able to meet the minimum wage norms fixed by the respective state government. Also, considering that minimum wages are regularly updated, the organization could run the risk of falling below the set wage limit.

How is Gross Pay different from Basic Pay?

Basic pay is the minimum sum of earnings that an employee is to receive. The individual may receive additional money by earning incentive bonuses or working overtime. The extra earnings made from logging in overtime do not raise the employee’s basic salary. Similarly, the monetary incentive paid out by the employer throughout the year does not impact the basic salary. The basic salary will usually be less than the gross salary.

On the other hand, gross pay includes not just the employee’s base pay, but also any additional earnings. Say, if an employee puts in extra hours or is the recipient of an incentive bonus, the additional earnings shall appear in the individual’s gross pay.

Is overtime pay part of Basic Salary?

No, extra pay for overtime work does not form part of the basic pay. It is factored in while calculating gross salary.

Is Basic Salary gross or net?

Basic salary is different from gross pay and net pay. It is a fixed amount of money that an employee receives prior to any extras being added or payments deducted. Gross pay, on the other hand, includes not just the employee’s base pay, but also any additional earnings. Net salary (also referred to as the Take Home Salary) is what an employee takes home after all the required deductions are made from the gross salary.

How is DA calculated in basic salary?

Dearness allowance (DA) is computed as a percentage of basic pay. This amount will differ depending on the location of the employee.

How much is the Basic Pay of CTC?

Usually, the basic salary is 40% to 50% of CTC (Cost to Company). Statutory components such as bonus, PF, gratuity, and other benefits are determined on the basis of the basic salary. Any increase or decrease of basic salary can affect an employee’s CTC.

Is Basic Salary taxable?

Yes, the basic salary is fully taxable.

What are the various components that form the salary?

The components of the salary structure are basic salary, dearness allowance, medical allowance, conveyance allowance, HRA, leave travel allowance, children education allowance, children hostel allowance, mobile & telephone reimbursement, car maintenance, driver salary, books & periodicals, and special.

What are the various deductions applicable to CTC?

Some of the common deductions applicable while determining take-home salary are Provident Fund, ESIC, Professional Tax, and Labour Welfare Fund.