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What are the components of Salary, How is take home salary calculated? What are different kinds of allowances, what is Dearness allowance, What is the salary of a Government employee, what is 7th pay commission? This article tries to answer these questions.

Components of Salary

Money that is received under Employer-Employee relationship is called as  Salary. If one is freelancer or is hired by an organization on contract basis, their income would not be treated as salary income. In such case the  income is treated as income from business and profession. The salary consists of following parts.

  • Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure.It  is a fixed part of one’s compensation structure. Many allowances and deductions are described in terms of percentage of the Basic Salary. For example  Your PF is deducted at 12% of your Basic Salary. HRA is also defined a percentage of this Basic Salary.
  • Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Children’s Education Allowance, City compensatory Allowance etc.  Allowance can be fully taxable, partly or non taxable.
  • Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.

The whole amount is spilt into basic pay and various allowance,to provide the tax benefit to employee.

Gross Salary :  Salary before deductions is called as Gross Salary.

Deductions : Certain deductions are available from the gross income, under such as tax- saving deductions under Income tax sections 80C to 80U. Some examples are  contributions to provident fund, payment of Life Insurance Premium,  subscription to certain equity shares or debentures, bank deposits under notified scheme,etc. Deductions can also be claimed against medical expenses of your dependants. Professional tax is also allowed as a deduction from your salary income.

Your Take-home salary will include

  • Gross Salary received each month
  • minus allowable exemptions such as HRA, LTA, conveyance allowance etc.
  • minus income taxes payable (calculated after considering Section 80 deductions)

Example of Take Home Salary from our article, Salary, Net Salary, Gross Salary, Cost to Company: What is the difference, is shown below

Component of Salary(per annum or p.a) Amount
Basic Salary 480,000
Dearness Allowance  48,000
House Rent Allowance  96,000
Conveyance Allowance  12,000
Entertainment Allowance  12,000
Overtime Allowance  12,000
Medical Reimbursements  15,000
Gross Salary 6,75,000

Your Cost to Company (CTC)  includes 

  • Salary received each month
  • Retirement benefits such as PF and Gratuity
  • Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

Benefits vary from company to company. Example of benefits for the above employee are:

Medical insurance 2000
Provident Fund (12% of Basic) 57,600 (12% of 4,80,000)
Laptop 50,000
Total Benefits 109600
Cost to Company=Gross Salary + Benefits 6,75,000 + 109600=7,84,600

Allowances

Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. Some allowances are taxable,some are partially taxable and some are tax free. There are various Kinds of Allowances that one can get under the Head Salary. Some popular Allowances are

  • House Rent Allowance or HRA : The allowance is for expenses related to rented accommodation. Salaried individuals who live in a rented house/apartment can claim House Rent Allowance or HRA to lower taxes. This can be partially or completely exempt from taxes.
  • Conveyance allowance is given to employees to meet travel expenses from residence to work. The conveyance allowance for up to Rs.9,600 per annum is exempt from tax. Starting FY 2015-16, this limit has been increased to Rs.19,200 per annum.
  • Leave Travel Allowance: Salaried employees can avail exemption for a trip within India under Leave Travel Allowance. The exemption is only for shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children and parents, but not with other relatives.

Income Tax webpage talks of the Allowances available to different categories of Tax Payers, what are the exemptions available on Allowances, under which section of Income Tax Act.

What is Dearness Allowance?

Dearness Allowance  is allowance is paid to the employee against the price rise in country economy i.e  to mitigate the impact of inflation.In India the Dearness Allowance (DA) is a cost of living adjustment allowance paid to Government employees, Public sector employees (PSU)and pensioners . It is taxable.  Dearness Allowance is calculated as a percentage of an  basic salary.The guidelines that govern the DA vary according to where one lives (for example, whether rural or urban). The Dearness Allowance was introduced following the second World War, and was then known as the  Dear Food Allowance.

Central Pay Commissions 

The government constitutes the Central Pay Commission(CPC) almost every 10 years to revise the pay scale of its employees and often these are adopted by states after some modifications. Unlike in the private sector, the pay hike in government is a once-in-10-years-affair, making  CPC, right from the first that submitted its report in 1947, a hugely powerful agency. Yes Government employees have to undergo an annual appraisal process called Annual Performance Appraisal Report (APAR), but that exercise is only for promotion, and not for any pay hike. Government employees do get a regular hike in dearness allowance, a measure meant for offsetting inflationary pressure on their earnings, but at the end of the day it is the CPC that fixes the bureaucrats’ pay for 10 long years. Image below shows the salaries of some of the Government officials, Reference Times of India.

Pay of Government Employees

Pay of Government Employees

Initially DA was given in response to demand of employees for wage revision, however later it was linked to Consumer Price Index. Our article Understanding Inflation covers Inflation,WPI & CPI in detail.  In the past various committees have been constituted to look into the issue of payment of DA  to Central Government employees. That’s precisely why officers and staff of every service can’t afford to ignore the CPC. An overview of the various Central Pay Commissions is given below. For detailed information,read Wikepedia’s Pay Commission

Central Pay Commissions Date of Appointment Date of Submission of Report Highlights
First Pay Commission May, 1946 May, 1947
Second Pay Commission August, 1957 August, 1959
Third Pay Commission April, 1970 March, 1973 Payment of DA whenever the CPI rose by 8 points over the index of 200 (with base 1960 = 100). The extent of neutralisation granted with effect from 1-1-1973 ranged from 100% to 35%
Fourth Pay Commission June, 1983 Three Reports submitted in June, 1986;
December, 1986 and May, 1987 respectively
Implemented with effect from January 1, 1986.The grant of DA on a ‘percentage system’ of the basic pay (1986).It also recommended payment of DA twice a year; 1 January and 1 July.Each instalment of DA was to be calculated with reference to the percentage increase in the 12 monthly average of All India Consumer Price Index (base 1960). The extent of neutralisation now ranged from 100% to 65%.
Fifth Pay Commission April, 1994 January, 1997 Implemented with effect from January 1, 1996.It looked into the issue of differential neutralisation and found it to be injustice to senior officers and recommended uniform neutralization of 100% to employees at all levels. The Commission had suggested that dearness allowance should be converted into dearness pay every time the cost of living rises by 50% over the base level.
Sixth Pay Commission October, 2006 March, 2008 Implemented with effect from January 1, 2006, .Recommended revision of base year of the Consumer Price Index (CPI) as frequently as feasible.It also changed base year for DA calculation to 2001 (base year 2001=100)
Seventh Pay Commission Feb, 2014 Before Dec 3015 Scheduled to take effect from January 1, 2016.

Seventh Pay Commission

The Seventh Pay Commission was set up by the government to revise remuneration of about 48 lakh central government employees and 55 lakh pensioners.  It’s mandate is to recommend pay, allowances and the like for Central government employees for a decade beginning January 2016,keeping in view the nation’s economic conditions and the need for fiscal prudence . Employees in union territories, regulatory bodies (except the RBI), Supreme Court and pensioners to be covered. It was constituted in February 2014. Expected to submit its recommendations by Dec 2015. Revised pay to be effective from January 1, 2016. Meena Agarwal is the secretary of the Commission. Other members are Vivek Rae, a retired IAS officer of 1978 batch and Rathin Roy, an economist.

The 6th Pay Commission played a key role in insulating the Indian economy from the shocks of the Lehman crisis of 2008. Salaries of government employees went up by an average of 35 per cent on the back of the 6th Pay Commission recommendations; employees also got arrears for more than 30 months because of the delayed implementation of the 6th Pay Commission in October 2008. According to Bank of America Merrill Lynch, higher salaries – resulting from the implementation of the 6th Pay Commission, drove two-wheeler and car sales, and led to a recovery in cement demand. The arrears resulted in robust demand for consumer discretionary products that resulted in sustained stock performance over 3-5 years.

Seventh Pay Commission impact will be two fold,

  • How the implementation of Seventh Pay commission for Government employees will boost the spending ability of Indian Middle class thereby boosting the economy.
  • At the same time jump in compensation in one shot there is the fears of inflation rise and fiscal pressure for government.

There’s no consensus about how much salaries will go up , Bank of America expects a modest 15 per cent increase, while Religare expects salaries to go up by 28-30 per cent. Credit Suisse says salary hikes can be as high as 40 per cent.Economists, however, agree that the 7th Pay Commission will help kick-start the domestic economy, which continues to be plagued by weak demand and excess capacity. For details one can read the article How the 7th Pay Commission can fire up the Indian economy- NDTV Profit

Salary of Government Employee

Central government salary is divided into various pay bands.  Government employees’ gross salary is sum of different components.  Typically Government salary is expressed as Rs( 5240-20000) + Grade Pay of Rs 2000 + central govt allowances. Ref Quora

  1. Basic Pay ex: Rs( 5240-20000). Number1 ex 5240 : It is the basic pay at which your salary is calculated when you are appointed. Number2 , 20000,: It is the maximum basic pay a person can receive in a designated post.
  2. Grade Pay :Apart from basic pay, government employees receive grade pay which depends on the category/class of employee. The sum of basic pay and grade pay is used to calculate dearness allowance and other allowances. 
  3. Dearness Allowance :The Dearness Allowance(DA) is a cost of living adjustment to allowance. It is calculated as a percentage of (Basic pay + grade pay). Dearness allowance is updated every quarter of calendar year to compensate for inflation in consumer price index. It may increase or decrease depending on inflation rate. (Decrease in DA is rare).
  4. House Rent Allowance :House rental allowance(HRA) is allowance paid for house rent. It depends city to city. Cities are classified as X, Y and Z, on the basis of their population, as recommended by Sixth Central Pay Commission in 2008. HRA is also used by the Indian Revenue Service(IRS) to provide income tax exemptions.
  5. Other miscellaneous allowances : Miscellaneous allowance(MA)  includes phone allowance, shift allowance, travel allowance etc.
  6. Percent – To compensate for inflation, an increment is added to your basic pay after a fixed period. This increment is in percent of your current basic pay and the fixed period is usually a year.

It means  salary will be calculated as (Basic + grade pay)+DA+HRA+MA. Presently, DA is around 110%, HRA may vary from 10% to 30% and MA can vary widely.
Assuming DA=110% HRA=20% MA=40%

  • Basic pay = 5200-3%-20200
  • Grade pay =1800
  • Gross monthly salary = (5200+1800)+(7000*1.10)+(7000*0.2)+(7000*0.4) = 18900
  • Your net salary (that is your in hand salary) will be a little less due to PPF and other deductions. It is about 15-20% roughly. So net salary will be around Rs. 16000 per month.

This salary will change after every three months due to change in DA. After 1 year of service, your basic pay will be 5200*1.03 = Rs.5356. This increase in basic pay will continue every year till it reaches 20200 limit. But most likely because  one gets promoted to higher designation within first 4 years of service. And this cycle will continue with different basic pay limits. Though Basic pay changes after every promotion, Grade pay may or may not change with change in designation.

Various Pay Bands in the Government Salary as per 6th Pay Commission  from 90paisa.blogspot.in’s Expected Pay Structure Of 7th cpc is given below

6th CPC PAY STRUCTURE
(2006 – 2015)
Pay Band Pay Bands Grade Pay Pay in the Pay Band Pay Scale
PB-1 5200-20200 1800 5200 7000
PB-1 5200-20200 1900 5830 7730
PB-1 5200-20200 2000 6460 8460
PB-1 5200-20200 2400 7510 9910
PB-1 5200-20200 2800 8560 11360
PB-2 9300-34800 4200 9300 13500
PB-2 9300-34800 4600 12540 17140
PB-2 9300-34800 4800 13350 18150
PB-3 15600-39100 5400 15600 21000
PB-3 15600-39100 6600 18750 25530
PB-3 15600-39100 7600 21900 29500
PB-4 37400-67000 8700 37400 46100
PB-4 37400-67000 8900 40200 49100
PB-4 37400-67000 10000 43000 53000

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Hope this article helped in understanding components of Salary and How Government Salary is calculated and why there is so much talk about Seventh Pay Commission. Do you think Government Job is better than Private Job? Why or Why not?

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