Compensation and Benefits
Term compensation and benefits refer to salary and other benefits that organization provides to the employees. Benefits could be monetary or it could be non-monetary. It is one of the important parameter or HR roles. As while choosing the organization or to retain current employee one of the key aspect is compensation and benefits.
What is Compensation?
Direct and indirect monetary and nonmonetary rewards given to employees on the basis of the value of the job, their personal contributions and their performance. While making this payment one should be alive to the governing legal regulations.
To understand Compensation and benefits one should understand the Salary components.
| Component | Tax Deductions | Is PF applicable | Is ESIC applicable | Part of Gratuity |
|---|---|---|---|---|
| Basic | Fully Taxable | Yes | Yes | Yes |
| DA | Fully Taxable | Yes | Yes | Yes |
| Medical Allowance | Fully Taxable effective April 2018 | Yes (After Supreme court PF judgment 2019) | Yes | No |
| House Rent Allowance (HRA) | Tax exemption subject to minimum of following:
|
No | Yes | No |
| Leave Travel Allowance (LTA) | As per the actuals of the fare expenses on leave travel. | Yes | Yes | No |
| Conveyance Allowance | Fully Taxable effective April 2018 | Yes | Yes | No |
| Children Education Allowance | Rs. 100 for each child monthly up to children | Yes | Yes | No |
| Other Allowance | Fully Taxable | Yes | Yes | No |
Deductions, applied to the CTC to arrive actual take home salary. Some of the most common deductions:
| Deductions | How it is calculated? | Whom does it apply to? |
|---|---|---|
| Provident Fund | Employer and Employee each contribute 12% of PF wage. PF Wage = Gross salary – HRA |
Companies that have more than 20 employees. Employer is required to deduct maximum PF on PF wage of Rs. 15000 |
| ESIC | Employer contribution is 3.25% of Gross salary Employee contribution is 0.75% of gross salary |
Companies that have 10 or more employees. Employees who have gross salary less than Rs. 21000 a month, applicable to those employees. |
| Professional Tax | Varies from State to State | All employees of applicable state. |
| Labour Welfare Fund | Varies from State to State | All employees of applicable state, which might depend on designation. |
| TDS | As per employees income and their investment. | All employees of the organization |
Things we should keep in mind while creating ideal salary structure:
It should be compliant
While creating salary structure we need to ensure all applicable compliance are followed. Important compliance norms are like Minimum Wages, Provident Fund, ESIC, PT, Gratuity, and Statutory Bonus.
Reduce the employer liability
Define salary structure in a way as an organization we are compliant and it reduce the liability of employer.
Increase the employee on-hand salary
While defining salary structure this is also important to define structure in a way which provide maximum take home to employees.
Structure should be tax efficient
We need to define structure in a way it provide maximum tax benefits to the Employees. This is possible with the use of right salary components.
Structure should be consistent with logic
While defining salary structure we should define the logic. Employee job grades wise structure/ Salary range wise structure. But structure should be consistent at company level. Please do ensure very employee wise structure should not differ.
If at company level structure is bases on salary range, employees in same salary range should have same structure.
What is difference in Gross, CTC and Take home.
Gross Salary
Gross salary include all salary components like Basic, HRA, Medical Allowance, Transport Allowance, Education Allowance, Leave Travel Allowance, Other Allowance, Special Allowance, Exgratia etc.
Gross salary does not include any contribution made by the organization towards compliances.
CTC
Full form of CTC is Cost to Company. CTC include total Gross Salary plus contribution made by company towards compliance. These include contribution towards PF, ESIC, Statutory Bonus, Gratuity, Labour welfare fund. (Only Employer Contribution)
Take Home OR On hand salary
Take home salary means Gross Salary – (Employee contribution towards compliances + Tax). Contribution towards compliances is like contribution towards PF, ESIC and Labour welfare Fund. Taxes include Professional Tax and TDS.
To understand all 3 terms let us take one example along with Salary Structure.
In below-mentioned example
- Gross Salary = 35001
- To arrive CTC add company contributions and other payouts
- Company Contributions = 49755
- Final CTC = 469,766
- Now, to finalize take home
- Gross Salary- (Employee contributions + Tax) =32501
What are benefits?
Employee benefits refer to benefits provided by an organization other than the Fixed Compensation. Typically it refers to Health life insurance, retirement plans, life insurance, Mediclaim, disability insurance, vacation, employee stock options, variable pay, equity pay, accommodation etc.
What is difference between compensation and benefits?
Compensation and benefits both are very important part in motivating employees and to attract new talent pool. However, there is light difference between compensation and benefits.
Compensation is completely related to money which is being paid to employees.
On the other hand benefits are monetary as well as non-monetary.
