What is Basic Salary - Everything Explained

Salary and pension are part of one’s right to life and liberty under the Indian Constitution. Every employee receives an income statement on the payday where the term basic salary is highlighted.

This basic salary is the amount an employee receives before deduction or the addition of factors such as tax, allowance, bonus, etc.

Keep reading to understand this concept in detail.

Basic salary is the primary payment given to an employee by their employer against his/her performance. It is the amount apart from surplus or additional factors, such as bonuses, benefits or compensation from an employer's end.

Employers and employees negotiate and arrive at this amount while signing the job agreement. This structure is a part of an employee's compensation structure and varies according to his/her designation. This basic salary can increase yearly if an individual's appointment is made based on the pay scale.

Individuals should know that the basic salary percentage and type can differ according to industry type.

For instance, individuals working in the IT sector can opt for an in-hand wage or take-home salary. In contrast, an employee in the manufacturing sector may receive fringe benefits.

This factor is entirely dependent on employee strength and experience.

Now, let’s look at the basic salary calculation to understand this concept in detail.

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An employed individual should know that the basic pay is a vital part of his/her salary structure based on which PF, gratuity, etc., are calculated.

The companies usually apply simple formulas for basic salary calculations.

Annual basic salary = monthly basic salary X 12 months

However, there is no definite way to calculate the basic wage as it differs from company to company. Ideally, they use a reversed calculation method where a percentage of the salary and CTC is taken.

The basic pay is usually 40% of gross income or 50% of an individual’s CTC.

There are other ways of finding the basic pay. Another simple formula would be-

• Basic salary = Gross pay- total allowances (medical insurance, HRA, DA, conveyance, etc.)

Or

• Basic salary = Percentage of the CTC or gross pay

The basic salary in India can depend on several factors. Some of them are as follows.

• HR Policies- The policies set by HR impacts the basic salary. Depending on this factor, a proficient individual can receive higher compensation than colleagues at the same level.
• Company Policy- Most companies set a salary bracket and inform individuals during the hiring process.  This salary is based on factors such as demand and supply, company turnover, product, etc. For instance, the basic salary offered by an IT firm will be different from a small content writing firm.
• Designation- An employee’s designation significantly influences the basic pay. An individual with experience and qualifications is obligated to receive a better pay scale than the other employees.
• Location or Country- The social and economic factors may also contribute to the different salary brackets. For instance, the basic salary in India will be way different from the one in Europe.
• Industry or Sector- A base salary of an individual working in the media sector will differ from one in a software company.

Let’s check what the different components of basic salary pay are for a better understanding.

Here are the different components of a salary structure, including basic pay.

• Basic Salary - This is nearly 40-50% of an individual’s salary. Factors like qualification, experience, skills, etc., can influence this factor.
• Bonus - It is a part of the performance incentive.
• Dearness Allowance - DA is a small percentage of basic salary
• House Rent Allowance - Many companies offer HRA to help an employee get an accommodation
• Special Allowances - This includes internet reimbursement, entertainment allowance, etc
• Professional Tax - Individuals are liable to pay tax to the state government
• Leave Travel Allowance - A company gives this allowance against travel expenses of an employee and family.
• Provident Fund - The employee and employer jointly deposit an equal amount as EPF and pension fund. However, this amount will fall under deduction as per Section 80C of the Income Tax Act, 1961.

Let’s learn how to calculate salary from basic pay by a simple method.

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Ideally, the gross salary is a sum of basic pay before any deductions are made or added with allowances.

On the other hand, basic pay is a fixed portion of an individual’s monthly salary before all deductions.

The formula for gross pay is as follows.

Gross pay = Basic pay + HRA + DA + medical + conveyance + other allowances

However, if an individual knows the gross pay, then they can easily find the basic salary with the given formula

Basic salary = Gross salary - DA - HRA - conveyance - medical - other allowances

However, if an employment contract defines gross pay as a percentage of basic salary, then the formula will be -

Basic pay = Mentioned percentage x Gross pay

This is the right formula to calculate basic salary percentages.

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Here are some applicable additions made to an employee’s salary.

• Bonus
• Gratuity
• Overtime funds
• Additional tips
• Medical
• HRA
• DA
• Internet and mobile reimbursement

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Here are some deductions made into a basic salary

• ESI
• Labour fund (welfare)
• Professional tax
• Provident fund
• Pay reduction caused by strike
• Court order
• Salary sacrifice

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Let’s check the pros and cons of minimum basic salary in India for a better understanding.

The pros and cons of lower basic salary salaries have been discussed underneath. However, individuals should know that low gross pay and allowance will lead to a low basic salary.

Nevertheless, here are the pros-

• Lower tax payment
• Higher saving possibilities
• ESIC and PF will be less as compared to others
• More in hand cash

However, specific cons make a low gross salary dissatisfactory for some employees.

• Lower benefits in terms of gratuity
• DA is poor
• No or less bonus

These are the critical information on basic salary and its components. Individuals employed in a firm must check these factors in their salary slips to understand their pay structure.