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What is basic salary and how to calculate it?

Published: Monday 12th October 2020

The functions of the Human Resources involve one of the most important factors of an organization, calculation, and payment of employee compensation. While most of these metrics are run through a computer software, knowing your basics is incredibly important since there is always a person behind the system. Calculation of salary is not only required while paying the employee their monthly dues, but also while recruiting new candidates where they are offered attractive packages. Knowing the break-up of the final CTC is essential in order to understand what all is included and what are the deductions involved. The main component of the final CTC paid to an employee is the basic salary.

Excited employee reading postal mail letter regarding his basic salary increment,

This blog is going to address the meaning of basic salary, what it entails and how to calculate it, which is important information not just for the Human Resources professionals, but also all employees as it helps to keep track of their original earnings versus the final salary received in hand. Read the details below to know more!

What is basic salary?  

Basic salary is the fixed compensation payable to an employee apart from any additional perquisites and benefits. It also is the amount paid to an employee before considering any deductions. Additions such as dearness allowance, bonus, commission, and others are not a part of the basic salary but the final CTC.

However, for employees working from home, internet charges and phone usage also are calculated in the basic salary. This makes about 40 to 50 percent of your total CTC, as basic salary is the base of your total salary payable. All other allowances are calculated as a percentage of the basic salary. These include additions such as the Employee Contribution to Provident Fund, Annual Gratuity, and others.

The annual basic salary is your monthly basic multiplied by the number of months in a year.  

Annual Basic Salary= Monthly Basic Salary x 12

What is the formula to calculate basic salary?

Since there is no fixed formula to calculate the basic salary of an employee, it usually is 40 percent of the gross pay or 50 percent of the net salary payable (CTC).

Factors to consider while determining an employee’s basic salary:

  1. Country of operations
  2. Industry
  3. Company size and valuation
  4. Designation of the Employee
  5. HR Policies of the Organization

 How to calculate basic salary? 

The most important number required for the basic salary calculation is the gross pay or gross CTC.  The basic salary essentially is the amount paid to an employee before any additions or deductions made to the compensation. The gross CTC is an employee’s salary that includes all allowances without any deductions. It is calculated as shown below:

Gross CTC= Basic salary + Dearness Allowance (DA) + House Rent Allowance (HRA) + Conveyance Allowance + Medical Allowance + Other Allowances 

As seen above, to perform a basic salary calculation, you will need to reverse the formula. The basic salary calculation as per gross CTC has been described below:

Basics salary= Gross CTC- (Dearness Allowance (DA) + House Rent Allowance (HRA) + Conveyance Allowance + Medical Allowance + Other Allowances)  

Additions applicable to basic salary

  1. Overtime
  2. Bonus
  3. Gratuity
  4. Commission

Deductions applicable to basic salary

  1. Contribution to Pension
  2. Contribution to Salary Sacrifice Schemes
  3. Pay Reduction Due to Strikes
  4. Court Order Payments
  5. TDS
  6. Insurance Premiums

Tax implications of basic salary 

The reason that organizations do not calculate the basic salary higher than 40-50 percent is because the tax payable is calculated on the final CTC of an employee. The final CTC is the basis of the tax payable, which is why it is observed that junior and intermediate level job designations have a higher base salary than that of the positions higher up in the hierarchy. The senior level jobs have more perks and benefits added, which increase their total CTC.

Now that you understand the concept of basic salary and how to calculate it, you can step up to understanding the other inclusions and deductions involved in the calculation of the final amount payable, which will be covered in our upcoming articles on our hirer blogs. Stay tuned for more, and catch up with the latest HR blogs about virtual hiring here.

 

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