Components of Compensation

COMPONENTS OF COMPENSATION
Some of the components of the compensation includes:
Basic Salary
Basic salary is the base income of an employee, comprising of 35-50 % of the total salary. It
is a fixed amount that is paid prior to any reductions or increases due to bonus, overtime or
allowances. Basic salary is determined based on the designation of the employee and the
industry in which he or she works in. Most of the other components, like allowances, are
based on the basic salary. This amount is fully taxable.
Allowances
Allowance is an amount payable to employees during the course of their regular job duty. It
can be partially or fully taxable, depending on what type it is. Allowances provided and the
limits on it will differ from company to company, according to their policies.
 Dearness Allowance - Dearness allowance is a certain percentage of the basic salary

paid to employees, aimed at mitigating the impact of inflation. It is paid by the
government to employees of the public sector and pensioners of the same.
 House Rent Allowance – A house rent allowance is that component of the salary
which is paid to employees for meeting the cost of renting a home. It offers tax
benefits to the employees for the sum that they pay towards their accommodation
every year. Salaried individuals residing in rented homes can claim this exemption
and reduce their tax liability.
 Conveyance Allowance - Conveyance allowance, also known as transport allowance,

is a kind of allowance offered by employers to their employees to compensate for
their travel expense to and from their residence and workplace. Note - In Union
Budget 2018, a standard deduction of Rs. 40,000 has been introduced in lieu of
transport (Rs 19,200) and medical (Rs 15,000) allowances.
 Leave Travel Allowance - Leave travel allowance is eligible for tax exemption. It is
offered by employers to their employees to cover the latter's travel expense when
he or she is on leave from work. The amount paid as leave travel allowance is
exempt from tax under Section 10(5) of Income Tax Act, 1961. Leave travel
allowance only covers domestic travel and the mode of travel needs to be air,
railway or public transport.
 Medical Allowance - Medical allowance is a fixed allowance paid to the employees

of an organization to meet their medical expenditu19theorganisation . this is only p
provident fund is anre. Note - In Union Budget 2018, a standard deduction of Rs.
40,000 has been introduced in lieu of transport (Rs 19,200) and medical (Rs 15,000)
allowances.
Gratuity
Gratuity is a lump sum benefit paid by employers to those employees who are retiring from
the organization. This is only payable to those who have completed 5 or more years with the
company. The gratuity amount is paid in gratitude for the services rendered by the
individual during the period of employment. According to the Payment of Gratuity Act,
1972, gratuity is calculated as 4.81% of the basic pay. Most firms with a workforce of 10 or
more employees come under the Act.
Employee Provident Fund

Employee Provident Fund is an employee benefit scheme where investments are made by
both the employer and the employee each month. It is a savings platform that aids
employees to save a portion of their salary each month, from which withdrawals can be
made following a month from the date of cessation of service or upon retirement. At least
12% of an employee’s basic salary is automatically deducted and goes to the Employee
Provident Fund every month. The contributions are maintained by the Employees Provident
Fund Organization (EPFO).
Professional Tax
Professional tax is a tax levied on the income earned by salaried employees and
professionals, including chartered accountants, doctors and lawyers, etc. by to the state
government. Different states have varying methods of calculating professional tax. The
maximum amount that is payable in a year is Rs. 2,500. Employers deduct profession tax at
prescribed rates, from the salary paid to employees, and pay it on their behalf to the State
Government. The revenue collected is used towards the Employment Guarantee Scheme
and the Employment Guarantee Fund.
Perquisites
Perquisites, also referred to as fringe benefits, are the benefits that some employees enjoy
as a result of their official position. These are generally non-cash benefits given in addition
to the cash salary. Some examples of perquisites include provision of car for personal use,
rent-free accommodation, payment of premium on personal accident policy, etc. The
monetary value of perquisites gets added to the salary and tax is paid on them by the
employee.
ESIC
If a company has 10 or more employees (20 in case of Maharashtra and Chandigarh) whose
gross salary is below Rs. 21,000 per month, then the employer is required to avail ESIC
scheme for such employees. The employer's contribution will be 4.75% of gross salary,
whereas the employee's contribution will be 1.75% of gross salary.
Compensation packages in the IT sector-This sector ranks

among the most preferred employers.
In comparison, the so-called “new economy” companies make it a point to include
additional components like variable pay, performance linked incentives over and above the
base pay that they give out to their employees. With the aura surrounding the IT sector,
many employees have come to take for granted the high pay along with the attractive perks
and benefits that IT companies give.
ESOP’s
The IT sector pioneered the introduction of ESOP’s or Employee Stock Options plans for
the employees as a means of ensuring that employees take more ownership and
responsibility for their work by making them partners in the growth of the company. The
rationale for giving stock options to employees is that once they feel a sense of ownership
with the company in which they are working, their performance levels go up due to
increased motivation and satisfaction that such a practice tends to inculcate in the
employees. Given the fact that most IT stocks zoom ahead in value after the IPO or the
Initial Public Offering is announced and retains their valuations well into the company’s
existence, IT companies that offer ESOPs are much sought after by many employees.
Other Perks and Benefits

The IT sector provides additional benefits like transportation, medical allowance and
allowances for furnishing one’s house. With an emphasis on all round welfare as opposed to
paying the employees what is the minimum, IT companies ensure that their employees are
taken care of well. Many companies in the IT sector are quite liberal in insuring their
employees and their families under group medical insurance which provides adequate cover
to the employees and their families in case of illness and surgeries as well as accidents and
other unanticipated contingencies. Further, some IT companies go a step further and
provide for recreational allowances that ensure their employees’ vacation expenses are also
taken care of.
Reliance Industry – Remuneration policy

https://www.ril.com/DownloadFiles/IRStatutory/Remuneration-Policy-for-Directors.pdf
References- “Prachi Juneja” and Reviewed by Management Study Guide Content Team.

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COMPONENTS OF COMPENSATION

Some of the components of the compensation includes:

 Dearness Allowance - Dearness allowance is a certain percentage of the basic salary

 Conveyance Allowance - Conveyance allowance, also known as transport allowance,

 Medical Allowance - Medical allowance is a fixed allowance paid to the employees

Employee Provident Fund

Compensation packages in the IT sector-This sector ranks

Other Perks and Benefits

Reliance Industry – Remuneration policy

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