Now, most organizations follow Cost to Company concept to account total compensation of employees. Once the organization decides to hire an employee, discussion will happen on compensation part and thereafter the Cost to Company (CTC) package. Once the CTC amount is finalized, compensation structure will be prepared and shared with the employee as part of the offer letter or appointment order.
Salary structure is the sum total of compensation agreed upon as payment to the employee for fulfilling the employment terms and includes components such as Basic, Conveyance and as many components the organization wishes. HR needs to put in place a promotion and increment policy in the organization.HR needs to be aware of salary trends and salaries being paid in similar organizations. This would be helpful in determining the salaries to be paid to existing employees and new joinees.
Whenever a new employee joins the organization, HR department shares compensation structure of the employee and the date of joining to Payroll Processor. Therefore, every month, this task is a checklist item for Payroll Processor.
Apart from this, when employee becomes confirmed or gets promotion, there can be changes in compensation structure. HR then shares revised compensation structure with effective date to Payroll Processor. For Payroll Processor, this is another checklist item, month on month. HR needs to work with Line Managers to identify employees who can be promoted. Typically this is during the Performance Appraisal process. This could also happen during attrition or business expansion process.
HR needs to do the transactions relating to promotion and salary increments to employees. Increment letters are to be issued and Payroll advice to be given.
Typical components (heads) that are always present in an Indian Salary Structure
To begin with, broadly Current Earnings, Current Deductions and Net Pay.
Basic, House Rent Allowance (HRA), Conveyance, PF (Provident Fund), IT (Income Tax), Special Allowance, Profession Tax (PT), etc. would be some of the commonly used components.
Income or Current Earnings
Calendar days and payable days are vital information to arrive at current earnings. HR department will either share payable days or loss of pay (LOP) days to Payroll Processor, month on month.
The sum of all applicable compensation components, prorated for the payroll period, represents the earnings such as Basic, HRA, Conveyance, Medical Allowance and Special Allowance.
For employees with full payable days, this will be full earnings and for the rest, prorated earnings. For example, take the case of an employee who joined on 7th January, 2013. Here, payable days will be 25.
In addition to this, one-time payouts can also come as part of the earnings. For Payroll Processor, collecting inputs on one-time payouts (ad hoc earning) from HR is a checklist item every month. Examples of one-time payouts are Joining Bonus, Attendance Bonus and Overtime Pay, etc.
Entire amount earned by employee for the payroll cycle may not be payable to employee because there could be various statutory deductions, other organization specific deductions and one-time deductions.
Deductions affect the actual compensation, i.e. Net Pay of employee.
Payroll Processor will receive information on statutory social security deductions to be made or not from HR. Typically, this covers Employee Provident Fund (EPF), Employees State Insurance (ESI) and Group Medical Insurance scheme (if any).
Profession Tax (PT) is a mandatory deduction based on compensation and is a checklist item for Payroll Processor to refer official circulars and updates and arrive at PT rates, deduct and deposit it to Local Government Agency.
Another important deduction is Income Tax. Payroll Process has to ensure that Income Tax as per Government regulation has been deducted (TDS - Tax Deducted at Source) and deposited to IT department. This has a specific window of financial year (April - March) and in case employee is not giving sufficient proof for tax saving investments, additional IT deduction can also be applicable.
When employee avails personal loan or a salary advance type of financial assistance from the company, there could be recurring deductions in the form of EMI (Equated Monthly Installment). Based on instructions from HR/Accounts, this can come up as another deduction.
In addition to this, one-time deductions can also be there. For Payroll Processor, collecting inputs on one time-deductions from HR is a checklist item every month. Examples of one-time deductions are Fines, Recoveries, etc.
Difference of current earnings and deductions will form the compensation, payable for the payroll cycle. Usually this is termed as Net Pay.
Reimbursements are a special set of components that are part of the payroll. This is typically introduced in the payroll to save tax. (Tax is to be paid by every employee to the government. The amount of tax is based on the income earned by the employee).
As the word suggests, reimbursements are money paid to you for some money that you have already spent. For example, a common reimbursement item is Medical Reimbursement. This indicates that if you spend some money on medical expenses (medicines, doctor charges, etc), then the company will reimburse (pay) you the amount spent. Another common reimbursement is Leave Travel Allowance (LTA).
All reimbursements are subject to upper limits. This means is that you can claim (request for payment) reimbursements only up to a certain limit. If your Medical Reimbursement limit is Rs.15000, then you can only claim up to Rs.15000.