COMPENSATION RULES AND DESIGN GUIDELINES

Monthly Components Guidelines Amounts (per month)

Basic As per Bombay Chamber of Commerce guidelines Rs.3750/- (minimum)

Minimum Basic figure for skilled, semi skilled and un maximum no limit..
skilled employees should be minimum of Rs.3550
(Unskilled), 3650(Semi-Skilled) and 3750/-(Skilled).
However to be on safer side, do not keep Basic figure
less than Rs.3750/- p.m.

Income Tax Benefit: NIL

House Rent Allowance Maximum 50% basic (Metro cities) 40% basic (non Maximum allowed 50%
(HRA) metro cities). Basic (Metro Cities)
OR 40% Basic (Non
Income Tax Benefit: Metro Cities)
Excess of Actual rent paid over 10% of Basic salary OR
Maximum HRA allowed (50% or 60% of basic) OR
Actual Rent Paid – whichever is lower is Exempt
from Tax.

For example.
Basic Rs.20000/-
HRA Rs.10000/-
Actual Rent Rs.8000/-
Excess of actual rent paid over 10% of Basic
(10%x20000 – 8000) Rs.6000
Hence max exemption allowed is lowest i.e. Rs.6000/-
subject to Rent Receipts of Rs.6000/- only
Transport Allowance Supposed to be conveyance allowance meant for Rs.800/- (max)
transportation between office and residence only.

Income Tax Benefit:

Exempt maximum up to Rs.800/- per month. No proof
required.
Children’s education Income Tax Benefit: Rs.200/- (max)
allowance Rs.100 per child subject to max 2 children. Hence
maximum Rs.200/- is exempt
Perquisite Allowance Balancing figure – after choosing all the above Balancing Figure
components with respect to their maximum limits
absorbed, remaining amount can be named as Special
Allowance. It is fully taxable.
Medical Can be given against bills or without bills does not Rs.1250/- (max)
Reimbursements matter. Some companies give it monthly, some
quarterly, half yearly or yearly also. Some companies
give it only against medical bills, some do not ask for
bills, rather bills are only demanded for Final Tax
Computation at the end of the year. No thumb rule
about it. Preferred to pay monthly, without bills and ask
bills as per your wish, quarterly, half yearly or at the end
of the year. Do not choose to give it against bills only,
there is no rule for the same…It only makes salary
processing a cumbersome process.
Income Tax Benefit:
Maximum Rs.1250/- p.m. (Rs.15000 p.a.) is exempt
only if Original Bills are provided.
Food Coupons Non cash component, exempt up to Rs.1000/- p.m. Rs.1000/- (max)
RETIRALS GUIDELINES Amount (per month)
Provident Fund Employer’s contribution (this is given to RPFC directly. 12% of Basic
However employee’s contribution is deducted from his
Monthly salary above and sent to RPFC. Hence total
deduction works out to be 12+12 = 24% of Basic.

Income Tax Benefit:

Employee’s contribution of 12% is eligible for Deduction
from Taxable income. It can be treated as exempt
investment.
Gratuity It is an annual component but since it is retrial benefit, it 15 days monthly basic
is included here. per year.

ANNUAL GUIDELINES AMOUNT (per year)

COMPONENTS
Leave Travel Journey within India primarily by Rail – 2nd A/c class for No Limit as such…
Allowance / employee and his immediate family (spouse, children,
Concession parents, siblings). Where rail transport is not available,
equivalent Public Transport like Bus is also allowed
equivalent to maximum 2nd AC Rail fair only.

Air transport Y class is allowed only to Central

Government employees.

Can be paid any time in the year in part or in full

whenever the employee claims it. However employee
must have proof of leaves taken for travel purpose and
should be away from office for at least 2 days in a year.

Income Tax Benefit:

Exemption will be on Actual expenses only.
Exemption is allowed only for two such journeys in the
block of 4 years starting from 1986 – 89 onwards.
Gift Vouchers Same on the lines of food coupons, these coupon Between Rs.3000/- to
companies like Sodexho Pass also provide attractive Rs.5000/-
Gift Vouchers, which can be given on Diwali Festival
Occasion. For junior employees amount can be lower,
for senior categories, amount can be higher up to
Rs.5000 or so.

Income Tax Benefit:

Please check with Tax consultants how much is exempt
from taxable income. As per my knowledge, it is not
more than Rs.5000/-

For Senior Management Employees only

PERQUISITES GUIDELINES AMOUNT (Per Year)
Rent Free Income Tax effect:
Accommodation Taxable perquisite – Value of rent free accommodation
considered taxable for the period of house occupied is
Owned or Managed by either of the following:
the Employer - For Private Sector Employees
(Includes Flat, Hotel, 10% of Salary (for metro cities) or (7.5% for non metro
Farmhouse, Guest cities) + Excess of Fair Rent Value (market rent) over
House, Caravan, etc.) 60% of salary (i.e. Market Rent – 60% of salary) = Total
taxable value of rent-free acco.
For PSU and Semi-Govt. employees
10% of Salary (for metro cities) or (7.5% for non metro
cities) OR Fair Rent Value whichever is lower is
 Taxable.
The term ‘Salary’ will include total of the following:
Basic, All Allowances & Reimbursements (excluding
Med. Reimb.), Bonus received, any commission, fees
etc.
Fair Rent – Market Rent or Municipal Valuation of Rent,
whichever is Higher.
Car Income Tax effect:
(For personal) Taxable Value will include the following –
Owned by the Actual Running & Maintenance expenditure incurred by
Employer the employer + Driver’s Salary + Depreciation – any
amount charged by employer to employee for personal
use of the car.

Employee Stock Employee exercises his option by buying out the shares
Option Plan during the exercise period however tax liability occurs
only when an employee sells the shares on the value of
sale made under the Capital Gains head of income.

OTHER BENEFITS OUT OF CTC STRUCTURE BUT STILL FORM PART OF COMPENSATION

Insurance Schemes – employees can be covered under following two schemes. The policy covers may be
kept between the range of Rs.100000 to Rs.500000/- depending upon the hierarchies or grade system in
your company.

• Personal Accident Insurance Scheme (for employee only)

• Medical Insurance Scheme (For employee & dependents which can be spouse, first two children,
parents or in-laws (either of them) etc. Some companies do not cover parents/in laws, some insurance
companies do. Please check this with them before taking a cover for your employees.
• Maternity Benefits – Some companies have their own maternity benefit schemes for their female
employees and some companies don’t have, rather the depend on Maternity Benefit Act provisions.
However it is not necessary, you can choose either of the one approach. Having companies own
scheme helps a lot because under the Act govt. procedures to claim benefits are always tedious one.

VARIABLE PAY / PERFORMANCE PAY / Incentives etc

This is not a salary. The objective of this is purely different than salary i.e. you perform; we pay you
accordingly. Whereas objective of Salary is to ‘Regularly’ compensate an employee with a ‘Regular’ figure
against the services extended by him towards the organization. Hence there is no Performance
consideration in Salary or CTC, so there is no logic to include this in CTC structure. VP is purely
performance driven and is not regular or fixed amount. Hence it should always be kept out of main Salary
Structure. Although most of the companies prefer to include this figure in CTC however it gives vague and
unrealistic impression of Salary. Because individual’s expectations from Salary as terminology differs than
Incentives/ Variables etc

Rather an independent and attractive Variable Pay or Incentive Structure can be designed and should be a
part of Rewards & Awards Strategy of the organization.

Following parameters can be kept in mind.

It can be Random figures with broad ranges depending on the Position, Grade, Designation of the
employees. For example if a company has Grades A, B, C, D, E, F then we can design incentive ranges like
for Grade A, Incentives can be within the range of 0 to 100000, where Rs.0 is for poor and negative
performance and 100000 is for Outstanding performers. Similarly employees falling in between can be given
%ages of this range. For example after Poor ratings, you can have Average or Good or Excellent Rated
employees. For them guidelines could be; this year average employees would get 30%-50% (i.e. Rs.30000/-
to 50000/-) Good employees can be given between 50% to 70% (i.e. Rs.50000/- to Rs.70000/- and
Excellent Rated employees can be given between 70-90% (i.e. Rs.70000 to Rs.90000/-) etc.

Another approach can be percentage of CTC can be given as Incentives. It can be 10%, 20% or 30% of
Monthly Salary or Basic + Allowances as the case may be. For example if you decide to keep 30% of Basic
+ Allowances as Variable Pay or Performance Incentives, you can further define eligibility on the basis of
performance ratings as follows. If someone’s CTC is Rs.500000/- and his Basic + Allowances comes to
375000 then his eligibility for incentives comes out to be 30%x375000=112500 i.e. the 100 % incentives for
Outstanding performance. However if he performs at ‘Good’ Rating, he may be given say anywhere
between 50-70% of 112500 as incentives.

Note:
You can also choose how you would disburse the amounts of incentives.
In my opinion best will be to include incentive amount in the monthly salary of employee for next financial
year…. Or some companies disburse it quarterly, half yearly or yearly on a lump sum basis. The decision
can be based on your intentions whether you would like to give a lump sum big amount in the hands of an
employee so that he can realize his big personal aspirations at one go, or you can choose to include this in
monthly salary so that employees’ monthly income inflates regularly.

A Total Compensation Structure may look like this.

MONTHLY ANNUALLY
SALARY COMPONENT Amount (Rs.) Amount (Rs.)
Basic Rs.3500 (min)
HRA 50% Basic (Metro cities) 40% Basic (Non Metro)
Transport Allowance Rs.800 (max)
Children’s Education Allowance Rs.200 (max)
Special Allowance Balancing Figure
Medical Reimbursements Rs.1250 (max)
Food Coupons Rs.1000 (max)
TOTAL MONTHLY SALARY
Net Take Home Total Monthly Salary – PF – Profession Tax

Retrial Components
Provident Fund (Employer. 13.75% Basic
Contr.)
Gratuity (15 days basic) 15 days Basic per anum

Annual Components
Leave Travel Allowance No Limit
Gift Vouchers Rs.5000 (max)

Perquisites - Only for Senior

Management
Car As given in guidelines
Rent free Accommodation As given in guidelines
ESOP As per company’s scheme
Any other Perks

ANNUAL C.T.C.

OTHER BENEFITS
Personal Accident Insurance Scheme – Rs.200000/-
Medical Insurance Scheme – Rs.200000/-

PERFORMANCE LINKED INCENTIVE PLAN

The Performance Linked Incentive Plan will be based on employee’s Performance Ratings during our
Annual Performance Appraisal Plan in the month of March / April each year. Each employee would be
eligible for a performance based incentive plan based on following guidelines.
(Incorporate any one of the following)
Maximum Potential Incentives under PLIP will be 30% of Total Monthly Salary. OR up to Rs.75000/- p.a.

Mahesh K Prasad
Head-Human Resources
09820775178