Code on Wages and Salary Structuring

April 2021 is around the corner and there are a lot of buzz about the four new labour laws which are going to be in effect from Apr 1, 2021. One of them is Code on Wages and that’s effectively a revised version of Payment of Wages Act 1936, Minimum Wages Act 1948, Payment of Bonus Act 1965 and Equal Remuneration Act, 1976.

One of the major questions that HRs are facing these days is how the definitions are changing and how it’s going to affect the salary structures. It is their Y2K problem. Employees—who are not in the HR community—are worried as to how this is going to impact their take home salary, as depicted by some of the news outlets in the country.

Before we begin

Please make sure that you read my previous article on how salary structuring works (keep in mind that it was pre-Apr 2021). That article will help you understand various jargons in the Comp and Ben sector and make sure that you get the difference, inter alia, between Gross Pay, CTC, Employer Contributions, Employee Deductions, etc. Let’s call that article a prerequisite for this one.


Code on Wages, along with the other three new labour laws, comes into effect from Apr 1, 2021; however, rules for all the four are not yet finalised and notified, but we hope that would happen soon so that they are in effect from the aforementioned date.

This article discusses some major impact these acts bring in to the Compensation and Benefits regime. I will focus more on the payroll structuring per se, rather than other major changes therein. Let’s dive in:

Structuring your salaries in the right way is crucial to make sure that both employees and employers benefit.

Definition of Wages

Definition of wages seemed to be one of the complicated definitions in the labour realm in India for many years. EPF Act defined wages differently than the ESI Act, and every other act in the country had its own definitions of Wages. With the new set of four consolidated labour laws in place, this confusion is removed. All the laws now provide a single definition of wages, as given below:

As per the Code on Wages:

“wages” means all remuneration whether by way of salaries, allowances or otherwise, expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes,—

  1. basic pay
  2. dearness allowance and
  3. retaining allowance 

Further, the Code excludes the following components from the definition of wages: bonus payments;

  1. any bonus payable under any law for the time being in force, which does not form part of the remuneration payable under the terms of employment;
  2. the value of any house-accommodation, or of the supply of light, water, medical attendance or other amenity or of any service excluded from the computation of wages by a general or special order of the appropriate Government;
  3. any contribution paid by the employer to any pension or provident fund, and the interest which may have accrued thereon;
  4. any conveyance allowance or the value of any travelling concession;
  5. any sum paid to the employed person to defray special expenses entailed on him by the nature of his employment;
  6. house rent allowance;
  7. remuneration payable under any award or settlement between the parties or order of a court or Tribunal;
  8. any overtime allowance;
  9. any commission payable to the employee;
  10. any gratuity payable on the termination of employment;
  11. any retrenchment compensation or other retirement benefit payable to the employee or any ex gratia payment made to him on the termination of employment
Excerpts from Code on Wages, 2019

Additional Clauses on Calculation of Wages

The goes on to state the following, which forms the crucial part while structuring salaries:

Provided that, for calculating the wages under this clause, if payments made by the employer to the employee under clauses (A) to (I) exceeds one-half, or such other per cent as may be notified by the Central Government, of the all remuneration calculated under this clause, the amount which exceeds such one-half, or the per cent so notified, shall be deemed as remuneration and shall be accordingly added in wages under this clause.

Provided further that for the purpose of equal wages to all genders and for the purpose of payment of wages, the emoluments specified in clauses (d), (f), (g) and (h) shall be taken for computation of wage.

Explanation.––Where an employee is given in lieu of the whole or part of the wages payable to him, any remuneration in kind by his employer, the value of such remuneration in kind which does not exceed fifteen per cent. of the total wages payable to him, shall be deemed to form part of the wages of such employee.

Reading the Clauses in the Act in Detail

  1. It is evident that the Basic Pay is part of Wages.
  2. DA, if it is part of the pay structure, it is included in Wages.
  3. Retaining Allowance is also part of the Wages. It is to note that Retaining Allowance ≠ Special Allowance. You need to specifically provide this component and with the specific purposes thereof to make it Retaining Allowance, in the Offer Letter/Appointment Letters.
  4. Gratuity, Statutory Bonus, HRA, ER EPF, ER ESI, OT, Commissions, and retrenchment compensation are excluded in the calculation of Wages.
  5. Payment in kind such as payment for house accommodation (some companies provide free house accommodation for their employees for the initial few days or for a longer term) shall be excluded from Wages
  6. Payment for special purposes shall be excluded from Wages
  7. Dispute Settlements are excluded from Wages
  8. Conveyance allowance is excluded from Wages.
  9. The exclusion components should not be more than 50% (of the gross pay). If it is more than 50%, then the 50% of the gross pay shall be deemed to be the Wages.
HR and Finance need to work together to tackle this ‘Y2K problem for HRs’

Can the Inclusion Components (Wages) be more than 50%?

Yes. The act only says that the exclusion components should not be more than 50%. That clearly means that the inclusion components should be at least 50%. This also means that the Wages should be at least 50% of the gross pay. It can very well be above the 50% limit; and it can also be 100% of the salary. Provide the entire Gross Pay as Basic Pay, and no one will question you (though this is not ideal for both the employee and the employer).

Should Basic Pay be 50% of Gross Pay (or 50% of CTC)?

There are some articles that say the Basic Pay should be 50% of the CTC, which is wrong. The act only says that the exclusion components should not be more than 50% (= inclusion components should be at least 50%). That does NOT mean that the Basic pay should be 50% of Gross Pay.

Further, no acts in India talks about the CTC. It’s a term that our companies and accounting officers coined. When an act refers to the word salary, it, generally, means the gross pay.

Are all allowances excluded from Wages?

Just because a component has the word ‘allowance’ it is not excluded as such. You may want to revise how the definition of Wages begins: “wages” means all remuneration whether by way of salaries, allowances or otherwise. It essentially says that the word ‘allowance’ simply does not exclude it from Wages.

Is Special Allowance Excluded from Wages?

This is a hot and debated topic over the last few months. Indian companies use Special Allowance as a bucket to fill in to reach the CTC. That is, when the CTC is split into different components such as Basic Pay, HRA, etc. the remaining amount  goes to Special Allowance so that they all add up to CTC. As long as your offer letter and/or the appointment letter does not have any specific definition (vide Exclusion List# E) related to Special Allowance, it is INCLUDED in the Wages. Here’s a presentation from Deloitte if you would like to have a look.

If you disagree with the above reading, please let me know in the comments and why.

Is HRA excluded from Wages?

Yes, HRA is excluded from the Wages Calculation.

Is Variable Pay included in Wages?

Performance-based variable pay will be an inclusion component in Wages, since that does not appear on the exclusion list.

So, what’s the big deal now?

The big deal is to make sure that your salary components are in line with the Code and that the Wages components is at least 50% of the Gross Pay. If your components are already in line with this math, you do not have to worry about restructuring at all. Peace!

Wait, can you tell me what all components can be there in a Salary Structure?

It would be unwise for an outsider to comment on how your components should be. However, below are some ordinarily paid salary structure components that one may find in the IT industry. I am trying to give you a comparison of those components with respect to the act.

ComponentIncluded in Wages?Taxable
Basic PayYesYes
Dearness AllowanceYesYes
HRANoYes/No, subject to limits
Special AllowanceYesYes
Conveyance AllowanceYesYes
Telephone & Internet ExpensesNoYes/No, subject to limits
Books & Periodical ExpensesNoYes/No, subject to limits
Fuel and Vehicle MaintenanceNoYes/No, subject to limits
Annual Gift CouponsNoYes/No, subject to limits
Monthly Food CouponsNoYes/No, subject to limits
Medical AllowanceNoYes
Uniform AllowanceNoYes/No, subject to limits
School Fee AllowanceNoYes/No, subject to limits

My recommendation would be to choose the excluded components that may be relevant to job families and job roles in your organisation. If you have certain such components to defray special expenses already in your organisation, you won’t have to remove them and may not have to make much changes. The catch is that these components will help reduce your Wages (yet keeping at the minimum requirements) and help employees save some income tax (flexi benefits—more on that later).

One needs to design the inclusion and exclusion components in the salary structure in such a way that it is both compliant and comfortable.

Hey, what if the Wage goes high? Is there a Problem?

Well, as I mentioned before, the definition of Wages is now standardised. All the acts say that the benchmark on which retiral benefits and other such employee benefits are calculated will be based on Wages. Hence, from a financial point of view, it would be a good idea to look at where you need to keep the balance.

Some companies still continue to pay EPF on the Basic Pay (which may still be over and above the statutory limit of 1800). Such calculations of EPF, ESI, etc. will now be on the Wages component. Some companies may take a hit unless they restructure the salaries since a hike in Wages may imply a hike in employer contributions as well. Likewise, the Gratuity is currently based on Basic Pay, which may change from Apr 1, 2021, subject to final terms in the rules yet to be finalised. Similar is the case with Statutory Bonus as well, whose details are still not finalised. You may read the act for more information on these provisions; I am skipping the details since it may derail the purpose of this act.

Can you give me a sample salary structure?

Yes, I will. Let’s consider the IT industry in Kerala for example.

ComponentIncluded in Wages?CalculationAmount (INR, Monthly)
Basic Pay (BP)Yes41.67% of Gross Pay15,000
HRANo40% of B. Pay6,000
Conveyance AllowanceNo2,000
Books & PeriodicalNo2,500
Fuel & Vehicle MaintenanceNo2,400
Internet & TelephoneNo2,500
Monthly Food CouponsNo2,500
Special Allowance (SA)Yes3,100
Gross Pay36,000
Employer EPFNo12%*(BP+SA)2,172
Employer ESINo3.25%*(BP+SA)588
Employer LWFNo20
CTC (Annual)4,65,360

In the above example, the Included Components (=Wages) sum as: 15,000 + 3100 = 18,100/- which is 50.3% of the Gross Pay.

Hey, you talked about Flexi Benefits. What’s it?

Flexi benefits is a way for providing income tax exemption benefits for your employees. There are certain salary components that the Government of India allows employees to save taxes on. The idea is to allow, at the start of the financial year, employees to choose these benefits if they want them. Employer may then exclude those components from TDS and at the end of the financial year, the employees shall submit the proofs to the employer who may then re-calculate the taxes based on the quantum of proofs. Some such components are:

  1. HRA: HRA up to 40% of the Basic pay in non-metro cities and 50% of basic pay in metro-cities is exempt from income tax (subject to certain other conditions therein)
  2. Food Coupons: Differs for industry and days of work, but in general Rs. 2500/- per month is exempted when provided as food coupons/food cards (not as cash).
  3. Annual Gift Coupons: A sum up to Rs. 5000/- per year if provided as a gift coupon is exempted from income tax.
  4. Telephone and Internet: The cost of internet and telephone, against bill submissions, are exempted from income tax. You may keep a logical limit as Rs. 2500/- per month for the same.
  5. Books & Periodical: same as Telephone and Internet.
  6. Fuel and Vehicle Maintenance: Rs. 1800 to Rs. 2400/- per month depending on the CC of the engine, and only available for Cars. Usually provided to senior leaders or those who may undertake travels on behalf the company.

It may also be noted that if the company otherwise reimburses any of the above components, the same shall not be duplicated as a salary component.

In the interest of controlling the Wages, you may want to revisit if you should be offering all of these flexi benefit components at your organisation. If some employees do not opt for these, their Special Allowance may increase and hence the Wages. Have a look and decide for yourself!

Can we restrict the EPF to Rs. 1800/- per month?

Rs. 1800/-, which is the 12% of the statutory limit of Rs. 15,000/- per month is the mandatory (upper cap) payment to EPF. Any amount above this is voluntary. If the organisation decides to cap the EPF at Rs. 1800/- per month, they are at their will to do so. But if the organisation has provided a higher figure in the offer letter/appointment letter, they will not be able to take a one-sided decision of reducing this component. Maybe, you want to revisit your offer letter/appointment letter templates for future issues 🙂 

Can’t HRA be more than 40% of Basic Pay?

HRA can. 40% of Basic Pay is the limit for income tax exemptions. Don’t confuse yourself between income taxability and definition of Wages.

How’s it going to affect my take home salary?

If your organisation has included Gratuity as a component in the CTC, then if the Gratuity component goes up and CTC remains the same, it will effectively reduce your take home salary. Similarly, if the CTC is fixed and the employer redesigns the salary structure in such a way that the EPF/ESI component goes up, that will also affect your take home salary. It all depends on how your current salary structure is defined and how it is going to be in Apr 2021. Non-HR readers: you may want to consult your HR team soon!


This article is written in my personal capacity and advisory in nature. The figures or components mentioned herein have no relationship with my employer or employer’s decisions. Neither my employer nor does my professional role endorses the content in this article. I shall not be liable to any action that you conduct or pursue upon the reading provided by me above.

This article is also published on LinkedIn and Medium.

Salary Structuring: A Primer

Well, let’s admit it. At some point in our HR Career, we have all wondered: should we include DA mandatorily in the structure, should we keep the Basic Pay at 30%-40%, or Should CTC include Gratuity? Certainly, I did, especially as I come from an Engineering background with no formal education in HR. The beauty of lack of HR knowledge was that I had to find each of these stuff from scratch for which the web and my fellow HR colleagues from and around Kochi helped. Special thanks to the connections I received through NIPM (one of my imminent blogs is on why HRs should network; catch you there soon!).

In this article, I intend to give a primer—a very basic understanding—of how we can structure the salary in India. I would speak of the structure as of 2021, to the best of my understanding, belief and practice.

Wait, tell me about the parlance!

Before we begin, let’s make sure that we get the terms right. During my tenure as an engineer, I never cared about the terms such as Gross Pay and what mattered was the CTC and Cash in Hand. But as an HR professional, there’s more to it and I believe all folks across all departments should get an idea about the payroll parlance. Here’s the gist:

A high-level overview of components of CTC
  1. Cost-to-Company (CTC): This is an accounting term with no legal definition whatsoever. You cannot find this term in any of our labour acts. You use it for your convenience, or for accounting purposes. No one else cares (except probably the job applicants).
  2. Employee/Employer Contributions: There are some mandatory contributions that employee and employer have to make periodically. While employee contributes Employee EPF, Employee ESI, TDS, Professional Tax, Employee Labour Welfare Fund contributions, etc., the employer also needs to make contributions such as Employer EPF, Employer ESI, Employer Labour Welfare Fund contributions. Employee contributions are deducted from the Gross Pay, while Employer contributions are outside the Gross Pay. More on those terms below. Please note that EPF and ESI are mandatory only if your organisation falls into the respective requirements.
  3. Gross Pay: Before I define Gross Pay, we must understand that the CTC is the sum of all payroll expenses an employer incurs on an employee. Basically, CTC includes the salary and other expenses the employer incurs (more on that later). Now, let’s split the CTC as (What Employee Deserves + Extra Expense for the Employer). Here, the “what employee deserves” component is the Gross Pay. Look at the Venn chart above.
  4. Net Pay: An employee has to pay statutory (or even non-statutory) contributions such as EPF, ESI, TDS, etc. These contributions of the employee are deducted from the Gross Pay. In effect, the Net Pay = Gross Pay — Employee Contributions.

Well, we got it covered; pretty much!

It’s important to have the right mixture of components for a tasty meal.

What all are in the CTC?

Elementary, my dear Watson! CTC = Gross Pay + Employer Contributions.

Oh wait, I got your question. You’re basically asking, what all can be there in the ‘Employer Contribution’, correct? Well, the answer is ANYTHING. You can include the mandatory employer contributions as detailed above, plus some other stuff. Some companies include valuation of ESOP in the CTC, some include the amount that the company pays for insurances for the employee/family, etc. As a standard measure, let’s keep the statutory contributions such as ER EPF, ER ESI, ER LWF and the like in the CTC. The best practice, in my opinion, would be NOT to include benefits and other rewards in the CTC with the purpose of inflating it to look attractive. Variables are welcome to be included in the CTC, but we need to mention that they are variables.

How do I structure the Employee Salary?

We’ve finally come to the million dollar question. How do we compartmentalise the salary? I am trying to explain this in the form of a FAQ compilation below:

What are basically the components of Gross Pay?

Broadly, let’s say, Gross Pay contains the Basic Pay, DA, HRA, and other allowances.

Why have you mentioned HRA separately, even when it is an allowance?

HRA has some exemptions with respect to definitions of wages (e.g: EPF calculation where HRA is exempted from consideration).

Okay, understood. Now, tell me whether that DA is mandatory?

As long as you are paying above the minimum wages (read my other article on Minimum Wages to understand how DA is calculated), you can subsume DA in the Gross Pay, without having to show it separately. There are certain occasions (e.g: in the case of those who are using the Wage Protection System in Kerala) some organisations are forced to show DA separately, which I would have no objections against.

How about Basic Pay? Is it 30% or 40%?

Basic Pay used to be defined as any percentage of the Gross Pay by organisations at their will. But as per the proposed Code on Wages, 2019, to be effective from Apr 1, 2021, the (Basic Pay+DA) component should be at least 50% of the Gross Pay (legal nerds, please do not raise your eyebrows; I have used the term ‘should’ as in suggestive parlance and in a practical sense). Assuming that you are not showing DA component in the salary structure, let’s then fix Basic Pay as 50% of the Gross Pay.

Remember, if you are following 30% or 40% of Gross Pay as Basic Pay, you are recommended to revise the same to 50% wef Apr 1, 2021. This will, also, have impact on your financials such as Earned Leave Encashment, Gratuity, etc.

Earmarking the right amounts of the CTC under various heads is not only mandatory but the right thing to do.

Aha, I see. So Basic is Fixed. How about HRA?

HRA is NOT a mandatory allowance. But it is a general practice to provide HRA for the employees to meet their accommodation expenses. Further, HRA is exempt from income tax, while Basic Pay, DA and allowances such as Special Allowance are fully taxable. HRA has an income tax exemption rule, which is three-tiered, details of which I am omitting for now. For metro cities, a maximum of 50% of Basic Pay can be non-taxable, while in non-metro cities, it is 40%. I would then suggest that we go with HRA = 40% of Basic Pay if you are in Kerala.

We’re getting close. Now tell me about ‘Other Allowances’?

Code on Wages mentions about Retaining Allowance, which is an allowance provided to the employee for the retention purposes (this should be part of the offer letter if you are providing it, and you should call it ‘Retaining Allowance’ itself). Generally, new-age companies, usually do not include this in their structure and provide the rest of the salary as “Special Allowance”.

So, in short and in a crude form:

Gross Pay = Basic Pay + HRA + Special (Other) Allowance.

Can you explain it as a salary structure?

Well, that’s my job to explain. Here it goes:

A. Basic Pay50% of Gross Pay
B. HRA40% of Basic Pay
C. Special AllowanceRemaining amount to reach the Gross Pay
D. Gross PaySum of (A), (B) and (C)
E. Employee DeductionsTDS, EE EPF, EE ESI, PT, EE LWF, etc.
F. Net Pay(D) — (E)
G. Employer ContributionsER EPF, ER ESI, EDLI, ER LWF, etc.
H. CTCSum of (D) and (G)
Table 1: Sample Salary Structure

Wait, where is the Conveyance Allowance?

Conveyance allowance is a thing of the past. HRs usually included it in the salary structure since that component, up to an extent, along with Medical Reimbursement used to provide some tax benefits to the employee. Not any longer. It stopped two years ago when the concept of standard deduction was introduced in the union budget and there is no point of mentioning Conveyance Allowance in the pay structure unless you want to have one more column for your Finance team to manage.

(But wait, the Conveyance Allowance may sound well for salary structures when Code on Wages comes into force on Apr 1, 2021. That’s a different subject to talk about; but for starters, look at the exemptions from the definition of ‘wages’)

No, it can’t be this simple. I do not see any other allowance—such as LTA, Books and Periodicals, etc. Where are they?

Now we are on the right track! Well, these allowances are non-mandatory allowances, but at times provide great relief for the employees from a portion of their income tax. Such allowances are in fact reimbursements against actual bills, though some of them are paid in advance under the expectation that the employee would submit the bills to the employer by the end of the financial year.

Now to answer the question, yes there can be some such allowances as part of the salary structure. But they are simply the babies of the ‘Special Allowance’. Special Allowance (even this one is not a mandatory allowance; we use it as a filler bucket to make sure that the components add up to Gross Pay) is fully taxable. One can split the Special Allowance into smaller allowances/reimbursements so that a part of it becomes supposedly non-taxable. That’s a story for another discussion, which you can see in my next blog—Flexi Benefits as part of Salary Structure.

Okay, but you didn’t tell us about the statutory calculations yet.

Fine. Here’s the snapshot. Tables speak better.

ComponentPer Month ContributionObservation
EE EPF12% of (Basic Pay+DA+Other allowances excluding HRA)Go with 12% (Basic + DA + Special Allowance)*Some orgs have been exempted and some have 10% contributing rate
ER EPF12% of (Basic Pay+DA+Other allowances excluding HRA)Go with 12% (Basic + DA + Special Allowance)*
EE ESI0.75% of ESI WagesESI wages include all components including Basic Pay, HRA, Special allowance, OT, etc., but excludes components like Annual bonus, Retrenchment compensation, and Encashment of leave and gratuity
ER ESI3.25% of ESI WagesSame as above – 
PTDepends on your state and salary range. This will help you
EE LWFRs. 20/- for S&CE LWF in Kerala. Differs based on the nature of establishment
ER LWFRs. 20/- for S&CE LWF in Kerala. Differs based on the nature of establishment
TDSOn the Employee’s Earnings. Depends on the existing Income Tax rates
EDLI and admin chargesDetails hereOne may or may not include this as part of Employer Contributions
Table 2: Statutory Deductions on Salary

* Assumption: No other ordinarily paid allowances (other than those like OT, Performance-based incentive, etc).

Legal deductions are the savings for the retirement of your employees. Help them plan right!

So far so good. But I have read that there is a cap for EPF contributions. What is that and how is it incorporated in the salary structure?

Yes, EPF up to 12% of Rs. 15,000/-, i.e. up to Rs. 1800/- per month by Employee and Employer each is mandatory. If the (Basic + DA + Other allowances except OT, Bonus, HRA, etc.) is less than 15,000/- per month, then the EPF contribution will be less than Rs. 1800/-, which is fine. Suppose the above amount is Rs. 25,000/-. Then the 12% of 25,000 = Rs. 3000/-. The employee is not liable to pay this entire amount to EPF and can decide to cap it as Rs. 1800/-. This would mean that the employee’s EPF deduction will be Rs. 1800/- instead of Rs. 3000/-, meaning the net salary might increase since the deduction is lesser.

Another catch here is, the employer is liable to pay the equal contribution as the employee makes. So if the employee decides to cap it at Rs. 1800/-, the employer can also do the same, which may be a loss to the employee in the long term as a hole on the savings. But modern-day organisations tend to transfer the benefit of this capping to the employee, by fixing the CTC and increasing the Gross Pay to match the difference, still, all of them totalling to CTC. This would mean that the employee might get a higher net salary even if s/he caps the EPF contribution, but the transfer of benefit depends on the employer and is at their will.

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The post is getting longer by the minute. Would you like to conclude?

So, in short, our intention is to add up the component to Gross Pay and then add employer contributions to reach the CTC. When an offer is made (or a salary revision is recommended), companies usually look at the total cost that it would incur. The rest is on HR to design the structure in the most favorable manner.

More fun on the way

The calculation to sum up earnings, employer contributions, etc. to reach the CTC is pretty straightforward with simple arithmetic calculations. But it can become slightly complex when you are given a CTC and asked to bifurcate it to various components especially when there is a cyclic dependency is involved (e.g: ESI contribution depends on the components of the salary structure, while those components depend on the ESI contribution).

This is not rocket science and can be solved with a system of first-degree multi-variable equations. As long as we have HRMS in place, this won’t be a headache, but don’t you think it would be fun to go back to high school math and see how that helps in the above HR situations? Post your responses in the comment below and let’s see who gets it right first! Let me blog on the math later.

Salary Structuring may be an operational aspect of Human Resources, but it definitely is an important piece of the job.

This article is also published on LinkedIn and Medium.