What Is Salary And Its Components?

Introduction

Salary is the amount of money an employee receives from an employer for the work they do. In many jobs, employees are paid on a monthly basis on the agreed salary at the time of joining. You can even find the agreed salary details in your offer letter or appointment letter.

But the salary mentioned in a job offer may not be the exact amount you receive in your bank account. This is because salaries can have different parts which are known as salary components. By understanding these salary components you can know your actual salary that you can take home. It will also help you to read your salary slip, compare job offers and plan your monthly expenses.

What Are The Components Of A Salary?

Salary can have different parts depending on the type of  job and the company. Some common salary components are:

1. Basic Salary

Basic salary is the core component of an employee’s salary. It is a fixed amount of the compensation that an employee earns before any allowance, PF, benefits and incentives. Basic salary is a guaranteed pay in an employment contract and is considered to calculate other earnings. This salary can differ based on the employee’s designation, experience or industry type.

Example: If your monthly salary structure has a basic salary of Rs. 20,000, this is the main fixed amount before adding any other components.

2. Gross salary

Gross salary is the total amount calculated by adding up one’s basic salary and allowances, before any deduction and applicable taxes. Gross salary includes bonuses, over-time pay, commissions etc.

The mathematical formula to calculate your Gross salary is:

Gross Salary = Basic Salary + HRA + Other Allowances

3. Allowances

Allowances are extra amounts provided by an employer for meeting service requirements. Allowance can also depend on the type of job and company. 

Example: If your company provides you Rs. 2,000 as a travel allowance, that amount is added as a travel allowance. 

4. Bonus And Incentives

Extra pay can be offered on top of an employee’s usual salary. This money is often called a bonus or an incentive. The bonus amount can depend on the company’s policy. It may also be based on how well you do, whether you hit set targets, or on certain events.

Example: If you meet a monthly sales goal, the company might have a policy of rewarding you with an extra Rs. 3,000 as an incentive. This added amount is counted as a performance bonus/incentive.

5. Provident Fund aka PF

Provident Fund is a government managed retirement scheme for an employee. It is often termed as PF, wherein both employee and employer contribute a certain amount to build a sum of corpus for the employee. This amount is used after the employee’s retirement. 

In organizations, a certain amount, mostly Rs. 1800, is deducted every month from the employee’s compensation and hence, it is a part of the employee’s salary. At the same time, the employer adds money too, based on the rules that apply.

6. Gratuity

Gratuity is paid at once to an employee once they complete 5 years in the same organisation. It is a financial token of appreciation by the employer to the employee. The amount is 4% – 5% of an employee’s basic salary.

7. Other Benefits

Many companies provide extra perks in addition to the salary. These may cover health/medical insurance, paid leaves, meal benefits, transport facilities, creche service and others. However, it is important to know that these benefits differ from one employer to the other.

Difference Between Fixed And Variable Salary

Conclusion

Your salary is more than the number in a job offer. When you see what is included in your pay, it is easier to understand your take home amount. You can also plan your expenses each month with more confidence. This can also make it simpler to compare different job offers. It can even help you choose the right job before you accept.

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