Basic salary is the amount which does not include any additional benefits like HRA, bonus or any kind of tax deduction. Basic salary is an important part of salary structure which is 40-45% of the total CTC. Other components of salary such as gratuity, provident fund and ESIC are determined as per the basic salary. Read this article to know more about what is Basic Salary, Basic Salary Calculation Formula, Tax Liability and more.
Difference between basic salary and hourly pay
Employees who get basic salary, they get a fixed amount every month, no matter how many hours they work. In contrast, employees who are paid hourly are paid for the work they do on an hourly basis. Employees who are paid by the hour are usually entitled to overtime pay if they work more than 40 hours in a week.
Difference between Basic Salary, Gross Salary and Net Salary
|Basic salary||Gross salary||Net salary|
|Basic salary is the payment agreed upon by both the employer/company and the employee. This does not include overtime or any additional compensation.||Gross salary is the amount calculated by adding your basic salary and allowances before deduction of tax or any other deduction. This includes bonus, overtime salary, etc.||Net salary is the amount received from gross salary after tax, provident fund and other such deductions. Net salary is the take-home salary of an employee, that is, the amount that is transferred by the company to the bank account every month.|
Additional benefits and deductions to be added to basic salary
|Applicable additional benefits||Applicable deduction|
|Over TimeBonusGratuityTips||Provident Fund ESIC professional tax labor welfare fund|
How is the basic salary calculated?
As it is the base income, the basic salary is used to calculate the other components of the salary. Several components of the salary package can be calculated based on the basic salary amount (based on the employee’s grade under the company’s salary structure).
Usually 40% to 50% of a person’s CTC is his basic salary. The basic salary calculation is as follows:
Basic Salary = Gross Salary – Total Allowance (Medical Insurance, HRA, DA, Conveyance, Other Allowances)
It is important to note that the amount of money an employee earns by working overtime does not increase his basic salary. Apart from this, if an employee gets an incentive bonus in a year, then even this will not increase his basic salary.
How to calculate basic salary from gross salary?
Gross Salary = Basic Salary + HRA (House Rent Allowance) + DA (Dearness Allowance) + MA (Medical Allowance)
The various components of salary including CTC break-up are given in the table below. CTC includes all types of allowances, taxes, bills, insurance and investments. Apart from long-term and retirement benefits like provident fund and gratuity, all allowances and cash reimbursements are part of the package.
|Basic – ₹20,000||Provident Fund – ₹2,880|
|Dearness Allowance – ₹4,000||Professional Tax- ₹200|
|House Rent Allowance – ₹ 9,600||TDS- ₹4,042|
|Conveyance Allowance- ₹800||Other deduction – ₹2,000|
|Other Allowance – ₹ 5,600||—|
|Total = ₹40,000||Total = ₹ 9,122|
|Gross Salary = ₹40,000|
|Net Salary = ₹ 30,878|
Basic Salary Tax Liability
Tax is always applicable on Basic Salary so it should not exceed 40%-50% of CTC. However, it should not be kept too low because it will reduce other components of the salary. The basic salary of junior level employees or freshers is usually higher than that of senior-level employees.
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What happens if the basic salary is higher?
Answer: If the basic salary is too high, the tax liability of the employee will also increase. This also affects the liability of a company/organization as they also have to contribute more amount in ESIC and PF etc.
What happens if the basic salary is less?
Answer: If the amount of basic salary is kept low, the company/employer will not be able to fulfill the conditions of minimum salary set by the respective state government.
How is gross salary different from basic salary?
Answer: Basic salary is the minimum payment that an employee will get. It does not include other allowances like HRA, DA, etc. On the other hand, gross salary includes not only the basic salary of the employee but also the additional income. Suppose, if an employee works extra hours or receives an incentive bonus, then this additional earning will increase the employee’s gross salary.
Basic salary is gross or net?
Answer: Basic salary is different from gross pay and net pay. It is 40 to 50% of a person’s CTC. On the other hand, gross pay includes not only the basic salary of the employee but also additional allowances. Net salary (also known as take home salary) is the amount an employee gets after all necessary taxes and other deductions. This is the income that comes to the employee’s bank account every month.
How is Dearness Allowance (DA) calculated in Basic Salary?
Answer: Dearness Allowance (DA) is calculated as a percentage of basic salary. This amount will vary depending on the location of the employee.
What is the basic salary included in CTC?
Answer: Generally, the basic salary is 40% to 50% of the CTC (Cost to Company). Benefits like bonus, PF, gratuity are determined on the basis of basic salary. Any increase or decrease in basic salary can affect the CTC of an employee.
Is tax applicable on basic salary?
Answer: Yes, Tax on Basic Salary is applicable.
What are the deductions made on CTC?
Answer: Deductions like Provident Fund, ESIC, Professional Tax and Labor Welfare Fund are made while determining the take-home salary.