Module III

Compensation management
Compensation is defined as the consolidated amount, allowances received and various other kinds of benefits
and services which are offered by the organisation to their employees. In other words, compensation refers
to all forms of financial returns, services and benefits received by the employees from their organisation as a
part of their employment relationship.

Compensation is direct and indirect monetary benefits and rewards received by employees on the basis of
the value of the jobs, their personal contributions and overall performance. Such rewards are given to
employees by their organisation according to the ability of the organisation to pay and the legal provisions.

Compensation Management includes various areas such as job evaluation, surveys of wages and salary
analysis of relevant organisational problem, development of suitable wage structure, framing of rules for
administering wages and salaries, wage payment, incentive, control of compensation cost etc.

Objectives:
1. Toretain present employees by paying competitive remuneration.
2. To attract competent and qualified persons towards organization by offering fair wage and incentive.
3. To establish fair and equitable remuneration so as to avoid pay disparities.
4. To improve production, productivity and profitability of the organization.
5. To minimise un-necessary expenditure and to control cost through a device of internal check and
establishment of standard.
6. To improve and maintain good human relation between employer and employee through a process of
payment of bonus, profit sharing and other fringes benefits.
7. To enhance the name and fame of the company through a proper system of wage payment.
8. To ensure prompt and regular payment of wage and salary to all the employees.
Components of compensation or pay structure
1. Wage or Salary
2. Dearness and other allowances
3. Incentives
4. Fringe benefits and perquisites.
1. Wage or Salary:
Wage:
The term wage refers to the remuneration paid to the workers appointed on hourly, daily or weekly basis in
return for the service rendered.It varies according to physical and mental requirement of the job. Wage may
be minimum wage, fair wage and living wage.
i. Minimum Wage:
It is that wage which is sufficient to meet the basic need of a worker and his family. This minimum wage has
to be paid to the worker irrespective of the capacity of the industry to pay. The Committee on fair wage has
defined minimum wage as – “the wage must provide not only for the bare sustenance of life, but for the
preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measures
of education, medical requirements and amenities”.
ii. Fair Wage:
According to committee on fair wage “fair wage is the wage which is above the minimum wage but, below
the living wage”. It is fixed between the minimum wage and capacity to pay by the industry. The lower limit
of the fair wage is the minimum wage; the upper limit is set by the capacity of the industry to pay.
Fair wage depends on several factors like:
(a) The productivity of labour
(b) The prevailing rates of wage in the same or neighboring localities.
(c) The level of national income and its distribution.
(d) The place of industry in the economy of the country.
Thus, fair wage is determined on the basis of capacity of the industry to pay and region in which industry is
located.
iii. Living Wage:
It is the wage that provides some of the comforts of life. It provides certain amenities considered necessary
for the well-being of the worker. According to Fair Wage Committee “the living wage should enable the male
earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter but
also a measure of frugal (using only as much money or food as is necessary) comfort including education for
children, protection against ill health, requirements of essential social needs and measure of insurance
against the more important mis-fortunes including old age”.
Salary:
The term salary refers to remuneration paid to the employees appointed on monthly or annual basis in return
for the service rendered. Thus it refers to monthly rate of pay irrespective of number of hours put in by
employees.
Take Home Salary:
It is the net amount of salary received by an employee after making all the deductions towards the payment
of income tax, LIC premium and contribution to P.F. etc.
2. Dearness Allowance (DA):
Under section 3 of the Minimum Wages Act, DA is described as cost of living allowance. It is given to protect
the real wages of workers during inflation. In India it has become integral part of the wage system.Along with
DA other allowances like City Compensatory Allowance (CCA), House Rent Allowance (HRA), Medical
Allowance (MA), Education Allowance (EA), Conveyance Allowance etc., also form the part of compensation
package. Inclusion of all these allowances in the compensation depends on nature and type of job, contents
of job, place of job, terms and condition of appointment, capacity of employer etc.
3. Incentives:
Incentive is a reward paid in addition to wages whether monetary or not that motivates or compensates an
employee for performance above the standard. Payment of incentive depends on productivity, sales and
Profit of the organization.
4. Fringe Benefits and Perquisites:
Fringe Benefits:
It is a general term used to describe any of a variety of non-wage or supplemental benefits that employees
receive in addition to their regular wages. These include such employee benefits as provident fund, gratuity,
medical care, hospitalization, accident relief, paid holidays, health and group insurance, pension etc.
Perquisites (Perks):
Perquisites also called perks are the special benefits made available only to the top executives of an
organisation. These may include company car, furnished house, stock option scheme, club membership, paid
holidays etc.
Major Factors Influencing Compensation
1. The Organisation’s Ability to Pay:
Companies that have good sales and, therefore, high profits tend to pay higher wages than those running at a
loss or earning low profits because of the high cost of production or low sales. In the short run, the economic
influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay
no less than their competitors and need pay no more if they wish to attract and keep workers.
In the long run, the ability to pay is very important. During the time of prosperity, employers pay high wages
to carry on profitable operations and because of their increased ability to pay. But during a period of
depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like
hospitals and educational institutions) pay relatively low wages because of low or no profits.
2. Supply of and Demand for Labour:
The labour market conditions or supply and demand forces operate at the national, regional and local levels,
and determine organisational wage structure and level.
If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these
skills. When prolonged and acute, these labour-market pressures probably force most organisations to
“reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. The other alternative
is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive.
Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is
minimal, the wages will be relatively low.
3. Prevailing Market Rate(‘comparable wage’ or ‘going wage rate’)
An organisation’s compensation policies generally tend to conform to the wage rates payable by the industry
and the community. This is done for several reasons.
1. Competition demands that competitors adhere to the same relative wage level.
2. various government laws and judicial decisions make the adoption of uniform wage rates an attractive
proposition.
3. Trade unions encourage this practice so that their members can have equal pay, equal work and
geographical differences may be eliminated.
4. Functionally related firms in the same industry require essentially the same quality of employees, with
the same skills and experience. This results in a considerable uniformity in wage and salary rates.
5. If the same or about the same general rates of wages are not paid to the employees as are paid by
the organisation’s competitors, it will not be able to attract and maintain a sufficient quantity and
quality of manpower.
4. The Cost of Living:
The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This
criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index.

In recognition of the influence of the cost of

living, “escalator clauses” are written into labour contracts.

When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of
real wages. However, when living costs are stable or decline, the management does not resort to this
argument as a reason for wage reductions.
5. The Living Wage:
The living wage criterion means that wages paid should be adequate to enable an employee to maintain
himself and his family at a reasonable level of existence. However, employers do not generally favour using
the concept of a living wage as a guide to wage determination because they prefer to base the wages of an
employee on his contribution rather than on his need. Also, they feel that the level of living prescribed in a
worker’s budget is open to argument since it is based on subjective opinion.
6. Productivity:
Technological improvements, better organisation and management, the development of better methods of
production by labour and management, greater ingenuity and skill by labour are all responsible for the
increase in productivity. Actually, productivity measures the contribution of all the resource factors — men,
machines, methods, materials and management. Although theoretically it is a sound compensation criterion,
operationally many problems and complications arise because of definitional measurement and conceptual
issues.
7. Trade Union’s Bargaining Power:
Generally, the stronger and more powerful the trade union, the higher the wages. A trade union’s bargaining
power is often measured in terms of its membership, its financial strength and the nature of its leadership. A
strike or a threat of a strike is the most powerful weapon used by it.
Sometimes trade unions force wages up faster than increases in productivity would allow and become
responsible for unemployment or higher prices and inflation. However, for those remaining on the payroll, a
real gain is often achieved as a consequence of a trade union’s stronger bargaining power.
8. Job Requirements:
Generally, the more difficult a job, the higher are the wages. Measures of job difficulty are frequently used
when the relative value of one job to another in an organisation is to be ascertained. Jobs are graded
according to the relative skill, effort, responsibility, and job conditions required.
9. Managerial Attitudes:
These have a decisive influence on the wage structure and wage level since judgement is exercised in many
areas of wage and salary administration — including whether the firm should pay below average, or above
average rates, what job factors should be used to reflect job worth, the weight to be given for performance
or length of service, and so forth, both the structure and level of wages are bound to be affected accordingly.
These matters require the approval of the top executives.
Lester observes “Top management’s desire to maintain or enhance the company’s prestige has been a major
factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber
employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to
be factors in management’s wage policy decisions.”
10. Psychological and Social Factors:
Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure;
have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their
work, or in the wages they get.
Therefore, these things should not be overlooked by the management in establishing wage rates.
Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages should be
commensurate with their efforts,” that “they are not exploited, and that no distinction is made on the basis
of caste, colour, sex or religion.”
To satisfy the conditions of equity, fairness and justice, a management should take these factors into
consideration.
11. Skill Levels Available in the Market:
With the rapid growth of industries, business trade, there is shortage of skilled resources. The technological
development, automation has been affecting the skill levels at faster rates. Thus, the wage levels of skilled
employees are constantly changing and an organisation has to keep its level upto suit the market needs.
Compensation Management – 2 Main Forms
Employees give labour and in exchange for labour/service they want money and other benefits. Such money
and other benefits are compensation. The term ‘compensation’ may be defined as the money paid for the job
performed and the benefits/services provided to the employees.
The compensation is given in the following form:
I. Wage:
the term ‘wage’ is the pay of artisans or labourers receiving a fixed sum by hour, day, week or month, or for a
certain amount of work. In a narrow sense ‘wage’ is the remuneration paid to blue-collar workers for their
services, usually on hourly rate or daily rate.
i. Wage is remuneration
ii. It is paid to workers, especially maintenance and production workers
iii. It is payment in exchange for service / labour
iv. It is paid generally on fixed hourly / daily rate.
Wages may be expressed in terms of money called nominal wages, or in terms of purchasing power with
reference to some base year called real wages.
In broad sense, ‘wage’ refers to economic compensation paid by the employer to his workers in exchange for
their labour / service, under some contract. So, wage includes basic wage and also allowance like overtime
pay, holiday pay etc.
II. Salary:
Salary is a periodic, fixed payment for services, especially for official or professional services. It usually refers
payment to weekly or monthly rated employees like clerical, technical, supervisory and managerial
employees.
i. Salary is economic compensation
ii. It is a periodic fixed payment
iii. It is paid to white-collar employees like office staff, technical staff, managerial staff, professional staff
iv. It is paid by employer in exchange for services rendered by above categories of employees
Thus, ‘Salary’ is defined as economic compensation paid by employer to his monthly / weekly rated white-
collar employees for their services, under any contract / agreement.
Functions of Compensation Management
(1) The Equity Function
(2) The Welfare Function
(3) The Motivation Function
(4) The Retention Function.
(1) The Equity Function – It ensures that the employees are fairly paid and that their worth is appropriately
compared. This function ensures that more difficult jobs are paid more and that they are fairly compensated
in comparison to similar jobs in the market.
(2) The Welfare Function – This function is to take care of their psychological and social need satisfaction. The
employees worry about the family, and the liability should be reduced and their self-esteem needs should be
met to allow them to work without tension or unwanted stresses.
(3) The Motivation Function – The motivational function is to encourage an employee to take further
challenges, perform better and develop oneself for superior positions. This function, therefore, takes care of
career plans and training and development activities.
(4) The Retention Function – Today, human resources are being considered as a valuable asset to the
organization and because of retaining and developing the knowledge bank, the retention of employees has
become an important function of compensation management.
Wage Policy and wage boards

The term “Wage Policy” refers to legislation of government action undertaken to regulate the level or
structure of wages or both for the purpose of achieving specific objectives of social and economic policy.
A sound wage policy maintains industrial peace, satisfies both the employers and the workers, increases the
output of the firm and efficiency of workers, reduces costs and maximizes profits.
Major factors that may affect the wage policy are as follows –
1. Internal equity
2. External equity
3. Productivity
4. Cost of living
5. Motivation level of workers
6. Pay base performance
7. National wage policy
8. Statutory obligations
9. Labour market conditions
10. Present rate of attrition of employees.
Main Concepts of Wage Policy:
1. Minimum Wages,
a wage which is just sufficient for the worker to keep his body and soul together. The committee on
fair wages defined the minimum wage as irreducible (minimum) amount considered necessary for the
sustenance of the worker and his family and for the preservation of his efficiency at work. The Fair
Wages Committee considered that “a minimum wage must provide not merely for the bare
 subsistence of life but for the preservation of efficiency of the worker. For this purpose, the minimum
wage must also provide for some measure of education, medical requirements and amenities”.
Objectives of a minimum wage
1. To prevent the sweating of workers in organised or unorganised industries.
2. To prevent the exploitation of workers and to enable them to obtain wages according to their productive
capacity.
3. To maintain industrial peace.

2. Fair Wages
a fair wage is one which can be fixed only by comparison with an accepted standard of wages. Such a
standard can be determined in relation to those industries where. Such a standard can be determined
in relation to those industries where labour is well organised and is able to bargain well with
employers.
3. Living Wages
A living wage is a wage – (1) which should provide absolute essential needs like food, clothing and
shelter, (2) which should be sufficient for the worker and his family to live in a frugal comfort; (3)
which should provide an insurance against future risks, and (4) which should be according to the
special skill of the worker, if any
Factors Influencing Sound Wage Policy:
1. Demand and Supply:
If the supply of labour is abundant, workers will be ready to work for lower wages. But if the supply of labour
is scarce, workers will demand higher wages.
2. Prevailing Wage Rates:
Wages paid by one firm generally depend upon the wages paid by other competing firms or by other firms in
the same locality or by the industry as a whole for the same type of work.
3. Ability to Pay:
The wage level of the organisation largely depends upon the ability of the firm to pay to its workers. The
ability to pay, in its turn, depends upon the amount of profits earned by the organisation. Therefore, wages
will be generally raised as the firm’s net profitability increases.
If the firm’s earnings increase beyond reasonable level of return on the capital employed, workers claim that
they are entitled to participate in the surplus profit. However, it becomes necessary first to determine
precisely the fair amount of profit.
4. Productivity:
It is argued that wages should be commensurate with the productivity of the workers. Therefore, the higher
the productivity, the higher will be the wage level to be paid to the workers.
5. Cost of Living:
Changes in cost of living therefore lead to changes in the wage-rates. Increase wage-levels whenever the cost
of living rises. What is important is not the money wage but the real wage which actually satisfies the needs
of the workers. Hence money wages should be adjusted to maintain the real wages intact.
6. State Regulation:
Since workers’ bargaining power is weak, the State steps in to protect their interest by regulating their wage-
rates. The State, by enacting necessary legislation, guarantees minimum or fair wages to workers so as to
enable them to lead a decent standard of living.
7. Job Requirements:
Generally jobs requiring higher authority and responsibility are paid higher wages. Similarly, jobs which
require highly skilled workers are also highly paid. Again, jobs which are very risky and dangerous (e.g. pilots)
are also highly paid.
8. Trade Unions:
Workers who are well organised into trade unions are able to get higher wage-rates whereas those who have
not formed such unions are not able to get higher wage-rates.
9.Other Factors:
Like market conditions, prevalence of competition in the market, bargaining power of workers and such
other conditions.
National Commission on Labour on Wage Policy
According to the NCL, “The main aim of a wage policy, as we envisage it, is to bring wages into conformity
with the expectation of the working class and in the process seek to maximum wage employment”.
objectives of a wage policy in developing countries:
a. To abolish malpractices and abuses in wage payment.
b. To set minimum wages for workers whose bargaining power is weak because they are unorganized or
inefficiently organized, accompanied by separate measures to promote the growth of trade unions and
collective bargaining.
c. To obtain for the workers adjust share in the fruits of economic development, supplemented by
appropriate measures to keep workers’ expenditure on consumption goods in step with available supplies so
as to minimize inflationary pressure.
d. To bring about a more efficient allocation and utilization of manpower through wage differentials and,
where appropriate, systems of payment by results.
In India, the objectives of a national wage policy may be stated thus:
a. To provide a minimum wages to workers employed in sweated industries.
b. To improve the existing wage-structure.
c. To fix wage ceilings.
d. To accelerate export promotion.
e. To control inflationary tendencies.
f. Other objectives.
i. To bring social justice to workers and equal opportunities of personal development-through the
development of the socialistic pattern of society as laid down in Directive Principles of State Policy in the
Constitution.
ii. To maintain industrial peace, which cannot be achieved only through statutory measures and ban on
strikes and lock-outs and compulsory arbitration.
iii. To provide guidance to various authorities charged with the task of wage fixation and revision.
iv. To develop the skill of newly-recruited industrial labor and other manpower resources.
The limitations of wage policy
1. Enforcement – Enforcement in unorganised sector.
2. Rise in Prices – Prices rising is almost beyond government’s regulatory capabilities.
3. Wages versus Productivity – Wages lag far behind from the labour productivity.
4. Imbalanced Labour – Lesser number of workers in organised sector takes away bulk of wages than
unorganised.
5. Less Skilled Labour – Ever increasing addition to workforce yet death of skilled labour.
6. Shifting of Methods – High wages may force employer to shift towards capital-intensive methods.
7. Reduction in Capital – High wages brings a reduction in the capital for growth.
8. Increased Consumption
Wage boards

It is set up by the Government, but in selection of members of wages boards, the government cannot appoint
members arbitrarily. Members to wage boards can be appointed only with the consent of employers and
employees. The representatives of employers on the wage boards are the nominees of employers’
organization and the workers’ representatives are the nominees of the national center of trade unions of the
industry concerned.

The composition of wage boards is as a rule tripartite, representing the interests of labor, Management and
Public. Labor and management representatives are nominated in equal numbers by the government, with
consultation and consent of major Central Organizations. These boards are chaired by government
nominated members representing the public. Wage board function industry-wise with broad terms of
reference, which include recommending the minimum wage differential, cost of living, compensation,
regional wage differentials, gratuity, hours of work etc.

Objectives of wage boards

1. To work out wage structure based on the principles of fair wages as formulated by the Committee on
Fair Wages
2. To work out a system of payment by results.
3. To evolve a wage structure based on the requirements of social justice.
4. To evolve a wage structure based on the need for adjusting wage differentials in a manner to provide
incentives to workers for advancing their skill.

Job evaluation

The Job Evaluation is the process of assessing the relative worth of the jobs in an organization. The jobs are
evaluated on the basis of its content and the complexity involved in its operations and thus, positioned
according to its importance.

Job evaluation is the process of determining and quantifying the value of jobs. It is the systematic scoring and
comparison of jobs along organizationally determined dimensions of job worth, such as, in the effort,
responsibility, complexity, importance, skills and the working conditions of a job. Job evaluation is a tool to
compare jobs consistently and classify them into appropriate pay ranges. The worth of each job within the
organization is determined through the Job Evaluation process (job analysis, job descriptions, & job
evaluations). This establishes the relative worth of a job in relation to the value of other jobs in the
workplace. The process can ensure that an organization’s pay system is equitable, understandable, legally
defensible, and externally competitive. Job evaluations can be used to help to attract desirable job candidates
and retain high performance employees due to fair and equitable pay scales.
Definitions of Job Evaluation
 International Labor Organization (ILO) has defined a job evaluation as: “Job evaluation is an attempt to
determine and compare demands which the normal performance of a particular job makes on normal
workers without taking into account the individual performance of the workers concerned”.
 According to Alford and Beatty, “Job Evaluation is the application of the Job Analysis technique to the
qualitative measurement of relative job worth, for the purpose of establishing consistent wage rate
differentials by objective means. It measures the differences between jobs on the job requirements, and
establishes the differential numerically (job rating), so that it can be converted to wage rate after the wage
level is determined”.
 Features of Job Evaluation
1. It attempts to assess jobs, not people.
2. Job Evaluation is the output provided by job Analysis.
3. It provides bases for wage negotiation founded on facts.
4. Job Evaluation does not design wage structure, it helps in rationalizing the system by reducing
number of separate and different rates.
5. Job Evaluation is done by group of experts.
6. Job Evaluation determines the value of job and the value of each of the aspects of job such as
skill and responsibility levels are also related and studied in connection with the job.
7. Job Evaluation helps the management to maintain high levels of employee productivity and
employee satisfaction.

Objectives of Job Evaluation

1. Wage and Salary Fixation

2. Restructuring Job Hierarchy: Job hierarchy refers to arranging various types of jobs in the order of their
importance wither on ascending basis or descending basis. Job evaluation exercise can be undertaken to
reduce the number of job levels by merging closely related jobs together.
3. To determine equitable wage differentials between different jobs in the organisation ;
4. To eliminate wage inequities;
5. To develop a consistent wage policy;
6. To establish a rational basis for incentive and bonus schemes;
7. To provide a framework for periodic review and revisions of wage rates;
8. To provide a basis for wage negotiations with trade unions.
9. To minimise wage discrimination on the basis of age, sex, caste, region, religion, etc.
10. To enable management to gauge and control the payroll costs.
11. Overcoming Anomalies: Job evaluation, if carried on periodically and objectively, helps in overcoming various
anomalies which may develop in an organization over the period of time with regard to compensation
management. Following Anomalies and evils which may develop in an organization and may be overcome by
job evaluation.
 Payment of high wages and salaries to persons who hold jobs and positions not requiring great skill, effort
and responsibility;
 Paying beginners less than that they are entitled to receive in terms of what is required of them;
 Giving a raise to persons whose performance does not justify the raise;
 Deciding rates of pay on the basis of seniority rather than ability;
 Payment of widely varied wages and salaries for the same or closely related jobs and positions; and
 Payment of unequal wages and salaries on the basis of race, sex, religion, or political differences.

Steps in the Job Evaluation Process

1. Review the choices of job evaluation methods such as job ranking, classification, factor comparison and point
factor analysis and select the method most appropriate to meet the organization’s needs.
2. Gather information on each job within the organization, analyzing job content to make sure it is clear and
understandable; job content can be revealed utilizing job questionnaires, job descriptions, interviews and/or
work site visits.
3. Ensure that each job description lists pertinent accountabilities and responsibilities; revise or expand job
descriptions using the information collected.
4. Evaluate each position utilizing the chosen method and link the ranked job to the organization’s existing
compensation system or to a newly developed pay structure. The point system evaluates the skill, effort,
responsibility and working conditions involved in the job; here, each of these factors is subdivided into sub
factors to provide standards against which each job is rated to determine its relative worth.
5. Create the appropriate pay grades and pay ranges in the pay structure and along with policies and
procedures setting out employee progress within the range.
6. Periodically review the job evaluation system itself, developing procedures for evaluating and modifying the
system and the resulting compensation decisions.

Process of job evaluation

1) Gaining Acceptance: first of all the cooperation and support of top management, employees and the trade
union should be obtained through communication and participation. For this purpose conferences, letters
and booklets can be used for explaining the aims and benefits of job evaluation.
2) Constituting Job Evaluation Committee: it is very difficult for a single person to evaluate all jobs objectively.
Therefore, a committee consisting of experienced and respected representatives of a management and
workers and outside experts should be constituted. Participation of employees in job evaluation will reduce
their doubts and suspicion about the programme.
3) Selecting Jobs to be Evaluated: Due to constraints of time and money it may not be possible to evaluate
each and every job. Therefore, some key jobs may be selected in each department. The key jobs are
evaluated in detail and the other jobs are compared with the keys jobs. The key jobs should be representative
of the type of work performed.
4) Describing the jobs: A detailed written description of every job is prepared to indicate the duties and
responsibilities involved in it. The job description is thoroughly checked to ensure that there are no
omissions and duplication in it. The acceptance of the employee performing the job is also obtained to the
job description.
5) Selecting the Method of Evaluation: The method most appropriate to the job and the organization is
chosen. If possible more than one method may be used to increase the accuracy of evaluations.
6) Weighing job factors: A job is compared with other jobs in terms of significant factors which may be as
follows:
 Experience
 Efforts and initiative
 Working conditions
 Responsibilities
 Supervision required
 Skill- mental and manual
 Weights are assigned to each job factor and total weights for a job to indicate its
relative value.
  Different jobs are arranged in a sequence in terms of their relative worth to the
company.
7) Assigning Money Values: each job is priced in terms of its worth. In other words, the sequences of jobs in
terms of their relative worth is related to a money scale.
8) Periodic Review: a periodic review and revision of job description will help to assuage the feelings of
employees who believe that their work was not properly evaluated. moreover, it will enable management to
update job description in the light of technological and other changes. For example, automation of a job
reduces physical effort, but increases responsibility.
Advantages / uses of job evaluation
1) Job evaluation is a logical and objective technique of ranking jobs and thereby removing wage inequities. It
is helpful in developing an equitable, rational and constant wage and salary structure.
2) It helps to improve industrial relations by reducing employee doubts and grievances arising out of wages. It
increases employee satisfaction on wage differentials.
3) It helps in fitting new jobs at their appropriate places in the existing wage structure.
4) It provides a clear and objective basis for wage negotiations and collective bargaining.
5) It simplifies wage administrations by making wage rate more uniform.
6) It facilitates job redesign by re-allocating the easy and difficult tasks equally among different jobs.
7) It reveals job which require less or more skilled workers than those already performing these jobs. In this
way job evaluation facilitates better utilization of the workforce.
8) Due to increasing mechanization and automation, performance depends in many cases more on the
machine than on the worker. In such cases, it is unrealistic to pay workers on the basis of their output. Job
evaluation is a realistic basis of wage fixation in these cases.
9) Job evaluation invariable involves detailed analysis of a job. Data generated in job evaluation is very useful
in selection, placement and training of employees.
Limitations of job evaluation
1) Job evaluation is not fully objective and scientific. There is considerable scope for subjective judgment and
human error. There is no standard list of factors to be considered and some job factors cannot be measured
accurately.
2) Job evaluation fails to consider several factors which influence the value of a given job from worker’s point
of view. Demand and supply of a particular skill, security of service, career prospects, social status, nature of
supervision, etc. are such factors.
3) Job evaluation makes the wage and salary structure inflexible by freezing wage differentials between jobs.
It makes little provisions for adjusting to prevailing wage rates and changing conditions.
4) Job evaluation is not well suited to determining the relative worth of managerial jobs. These jobs involve
considerable planning, decision making and supervision of others. These executive skills cannot be measured
in quantitative terms.
5) Some methods of job evaluation are difficult to understand. Workers and trade unions often oppose job
evaluation. They fear that it will do away with collective bargaining for settlement of wage rates.
6) Job evaluation is a time-consuming and expensive process. As job contents change revaluation of jobs
become necessary. Moreover, jobs standardization essential for proper evaluation maybe difficult under
changing conditions.
Essentials of successful job evaluation
 1) The support of top management must be won for job evaluation programme.
2) Operating managers should convince about the need for and programme of job evaluation. They should be
given training in fixing and revising the wages on the basis of job evaluation.

3) All the employees should be provided with complete information about the objectives, programme and
techniques of job evaluation.
4) Clear and accurate job descriptions should be prepared and jobs should be standardized before starting
the evaluation process.
5) All groups and grades of jobs should be covered in the programme. Similar jobs should be grouped
together for this purpose.
6) The techniques used should be simple to understand for employees.
7) The acceptance and support of the trade unions should be obtained.
8) The factors selected for evaluation should be measurable, and should represent the job content. This
factors should be clearly defined.
9) The job evaluation programme should not involve unreasonably high costs of installation and
administration.
10) In the evaluation process, the knowledge, judgment and experience of human resource department, line
managers and outside experts should be posted together.
11) The focus should be on rating the job not the job holder.
12) Job evaluation should be undertaken as an adjunct to collective bargaining.
13) Job evaluation should not adversely affect the terms and conditions of existing employees.
Job Evaluation Methods

Non-analytical Job Evaluation Methods

1. Ranking Method: This is the simplest and an inexpensive job evaluation method, wherein the jobs are ranked
from he highest to the lowest on the basis of their importance in the organization. In this method, the overall
job is compared with the other set of jobs and then is given a rank on the basis of its content and complexity
in performing it.
Here the job is not broken into the factors, an overall analysis of the job is done. The main advantage of the
ranking method is, it is very easy to understand and is least expensive. But however it is not free from the
 limitations, it is subjective in nature due to which employees may feel offended, and also, it may not be
fruitful in the case of big organizations.
2. Job Grading Method: Also known as Job-Classification Method. Under this method the job grades or classes
are predetermined and then each job is assigned to these and is evaluated accordingly.
For Example Class, I, comprise of the managerial level people under which sub-classification is done on the
basis of the job roles such as office manager, department managers, departmental supervisor, etc.
The advantage of this method is that it is less subjective as compared to the raking method and is acceptable
to the employees. And also, the entire job is compared against the other jobs and is not broken into factors.
The major limitation of this method is that the jobs may differ with respect to their content and the
complexity and by placing all under one category the results may be overestimated or underestimated.
Analytical Job Evaluation Methods
Factor-Comparison Method: Under this method, the job is evaluated, and the ranks are given on the basis of
a series of factors Viz. Mental effort, physical effort, skills required supervisory responsibilities, working
conditions, and other relevant factors. These factors are assumed to be constant for each set of jobs. Thus,
each job is compared against each other on this basis and is ranked accordingly.The advantage of this method
is that it is consistent and less subjective, thus appreciable by all. But however it is the most complex and an
expensive method.
Point-Ranking Method: Under this method, each job’s key factor is identified and then the subfactors are
determined. These sub-factors are then assigned the points by its importance.
For example, the key factor to perform a job is skills, and then it can be further classified into sub-factors such
as training required, communication skills, social skills, persuasion skills, etc.
The point ranking method is less subjective and is an error free as the rater sees the job from all the
perspectives. But however it is a complex method and is time-consuming since the points and wage scale has
to be decided for each factor and the sub factors.
The important thing to note is, the job evaluation is considered only with the analysis of a job and not with
the job holders.
Various modes of compensation
a)Wages and Salary- Wages represent hourly rates of pay and salary refers to monthly rate of pay
irrespective of the number of hours worked. They are subject to annual increments. They differ from
employee to employee and depend upon the nature of jobs, seniority and merit.
b) Incentives- These are also known as payment by results. These are paid in addition to wages and salaries.
Incentive depends upon productivity, sales, profit or cost reduction efforts. Incentive scheme are of two
types: Individual incentive schemes and Group incentive schemes.
c) Fringe Benefits- These are given to employees in the form of benefits such as provident fund,gratuity,
medical care, hospitalization, accident relief, health insurance, canteen, uniform etc.
d) Non- Monetary Benefits- They include challenging job responsibilities, recognition of merit, growth
prospects, competent supervision, comfortable working condition, job sharing and flexi time.
Perquisites
Perks are non-monetary benefits given to employees in addition to wages, salaries, and health/retirement
benefits. Different from wages, salaries, and health/retirement benefits, it is often considered extras that
are nice to have. That said, it can reduce employee turnover and attract top talent to your organization.

Perquisites are a benefit that the employees are entitled to because of the job or position they hold in the
company. They can be in both, cash or kind. For instance, a car given by the company’s side, rent-free
accommodation, etc. An employee can also exchange wages for some other benefit. It is known as ‘salary
exchange’ and ‘salary packaging’. Perquisites do not include the reimbursement of expenses that you have
incurred for office work.are a benefit that the employees are entitled to because of the job or position they
hold in the company. They can be in both, cash or kind. For instance, a car given by the company’s side, rent-
free accommodation, etc. An employee can also exchange wages for some other benefit. It is known as
‘salary exchange’ and ‘salary packaging’. Perquisites do not include the reimbursement of expenses that you
have incurred for office work.

Differences between Allowance and Perquisites

ALLOWANCES PERQUISITES

A fixed amount of money given periodically in Small benefits or perks offered by the employers
addition to the salary is called allowance in addition to the normal salary at free of cost

It is taxable on due/accrued basis whether it is

It is taxable in the hand of employees
paid in addition to the salary or in lieu thereon

Examples: transportation allowance, phone Examples: Rent-free accommodation, free

allowance etc. electricity etc.

Incentives
Incentives are monetary benefits paid to workmen in lieu of their outstanding performance. Incentives vary
from individual to individual and from period to period for the same individual. They are universal and are
paid in every sector. It works as motivational force to work for their performance as incentive forms the part
total remuneration. Incentives when added to salary increase the earning thus increase the standard of living.
The advantage of incentive payment are reduced supervision, better utilisation of equipment, reduced scrap,
reduced lost time, reduced absenteeism and turnover & increased output.
According to Burack & Smith, “An incentive scheme is a plan or programme to motivate individual or group
on performance. An incentive programme is most frequently built on monitory rewards ( incentive pay or
monetary bonus ), but may also include a variety of non monetary rewards or prizes.”
Kinds of Incentives
1. Individual and Organizational Incentives
2. Financial and Non-Financial Incentives
3. Positive and Negative Incentives
1) Individual and Organizational Incentives-
According to L.G. Magginson, “Individual incentives are the extra compensation paid to an individual for all
production over a specified magnitude which stems from his exercise of more than normal skill, effort or
concentration when accomplished in a predetermined way involving standard tools, facilities and materials.”
Individual performance is measured to calculate incentive where as organizational or group incentive involve
cooperation among employees, management and union and purport to accomplish broader objectives such
as an organization-wide reduction in labour,
material and supply costs, strengthening of employee loyalty to company, harmonious management and
decreased turnover and absenteeism
I) Individual Incentive System is of two types:
a) Time based System- It includes Halsey Plan, Rowan Plan, Emerson Plan and
Bedeaux Plan
b) Production based System- it includes Taylor’s Differential Piece Rate System, Gantt’s
Task and Bonus Plan
II) Group Incentive System is of following types
a) Scalon Plan
b) Priestman’s Plan
c) Co-Partnership Plan
d) Profit Sharing

Halsey Plan- Under this plan a standard time is fixed in advance for completing a work. Bonus is rewarded to
the worker who perform his work in less than the standard time and paid wages according to the time wage
system for the saved time.
The total earnings of the worker = wages for the actual time + bonus
Bonus = 33.5% of the time saved (standard time set on past experience) Or 50% of the time saved (standard
are scientifically set)
Example: Time required to complete job (S) = 20 hours
Actual Time taken (T) = 15 hours
Hourly Rate of Pay (R) = Rs 1.5
Calculate the wage of the worker.
Solution: T X R + (S-T ) X R
2
15 X 1.5 + (20-15 ) X 1.5 = 22.5 + 3.75 = 26.25 Rs
2
In this equation 3.75 Rs are the incentives for saving 5 hours.
Rowan Plan – Under this method minimum wages are guaranteed given to worker at the ordinary rate for the time
taken to complete the work. Bonus is that proportion of the wages of the time taken which the time saved
bears to the standard time allowed.
Incentive = Wages for actual time for completing the work + Bonus where,
Bonus = S-T X T X R
S
Emerson Plan – Under this system, wages on the time basis are guaranteed even to those workers whose
output is below the standard. The workers who prove efficient are paid a bonus. For the purpose of
determining efficiency, either the standard output per unit of time is fixed, or the standard time for a job is
determined, and efficiency is determined on the basis of a comparision of actual performance against the
standard.
Bedeaux Plan – It provide comparable standards for all workers. The value of time saved is divided both to
the worker and his supervisor in the ratio of ¾ and ¼ respectively. A supervisor also helps a worker in saving
his time so he is also given some benefit in this method. The standard time for each job is determined in
terms of minutes which are called Bedeaux points or B’s. each B represents one minute through time and
motion study. A worker is paid time wages upto standard B’s or 100% performance. Bonus is paid when
actual performance exceeds standard performance in terms of B’s.
Taylor’s Differential Piece Rate System - F.W. Taylor, founder of the scientific management evolved this
system of wage payment. Under this system, there is no guarantee of minimum wages. Standard time and
standard work is determined on the basis of time study. The main characteristics of this system is that two
rates of wage one lower and one higher are fixed. Those who fail in attaining the standard, are paid at a lower
rate and those exceeding the standard or just attainingthe standard get higher rate. Under this system, a
serve penalty is imposed on the inefficient workers because they get the wages at lower rates. The basic idea
underlying in this scheme is to induce the worker at least to attain the standard but at the same time if a
worker is relatively less efficient, he will lose much. For example, the standard is fixed at 40 units per day and
the piece rate are 40 P. and 50 P. per unit. If a worker produces 40 units or more in a day, he will get the
wages at the rate of 50 P per unit and if he produces 39 units will get the wages at 40 paise per unit for the
total output.
Gantt’s Task and Bonus Plan - In this, a minimum wage is guaranteed. Minimum wage is given to anybody,
who completes the job in standard time. If the job is completed in less time, then there is a hike in wage-rate.
This hike varies between 25% to 50% of the standard rate.
Profit Sharing – It is a method of remuneration under which an employer pay his employees a share in form
of percentage from the net profits of an enterprise, in addition to regular wages at fixed intervals of time.

Objectives of profit-sharing are as follows-

 Raising the productivity of the workforce

 Attract desirable and competent employees in the company
 Boosting the efficiency of the employees
 Encouraging the feeling of responsibility in an employee
 Develop the attitude and habit of waste elimination and scrap reduction amongst the workers
 To align the interest of the employee with those of the employer
 Encourage and develop a better understanding between the employees and management so that
sorting out issues in an amicable manner becomes possible.
 Reduce employee turnover and rate of absenteeism in the organization
 Bring about a spirit of cooperation and teamwork amongst the employees
 Encourage a proprietary attitude in the employees
 Boost employee morale
 Minimize administrative issues
 Ensure job security
 Encourage industrial democracy and harmony by developing good relations between the workforce and
the management
 Encourage equitable distribution of wealth and social justice

Advantages of profit-sharing
1. A healthy relationship between employer and employee
2. Additional income for employees
3. Increase in productivity
4. Less supervision
5. Reduced employee turnover-
6. Boost in team spirit
7. Social justice
Disadvantages of profit-sharing -

1. In the case of loss, no bonus

2. A disadvantage for a new firm –additional expenses and lack of proper support in the initial days
3. Deliberate profit mismanagement
4. The element of uncertainty
5. No distinction between good and bad employees

2) Financial and Non-financial Incentives- Individual or group performance can be measured in financial
terms. It means that their performance is rewarded in money or cash as it has a great impact on motivation
as a symbol of accomplishment. These incentives form visible and tangible rewards provided in recognition of
accomplishment. Financial incentives include salary, premium, reward, dividend, income on investment etc.
On the other hand, non-financial incentives are that social and psychological attraction which encourages
people to do the work efficiently and effectively. Non-financial incentive can be delegation of responsibility,
lack of fear, worker’s participation, title or promotion, constructive attitude, security of service, good
leadership etc..
3) Positive and Negative Incentives- Positive incentives are those agreeable factors related to work situation
which prompt an individual to attain or excel the standards or objectives set for him, where as negative
incentives are those disagreeable factors in a work situation which an individual wants to avoid and strives to
accomplish the standards required on his or her part. Positive incentive may include expected promotion,
worker’s preference, competition with fellow workers and own‘s record etc. Negative incentives include fear
of lay off, discharge, reduction of salary, disapproval by employer etc.
Fringe Benefits
Employees are paid several benefits in addition to wages, salary, allowances and bonus. These benefits and
services are called ‘fringe benefits’ because these are offered by the employer as a fringe. Employees of the
organization are provided several benefits and services by the employer to maintain and promote employee’s
favorable attitude towards the work and work environment. It not only increases their morale but also
motivate them. These provided benefits and services forms the part of salary and are generally refereed as
fringe benefits.
According to D. Belcher, “ Fringe benefits are any wage cost not directly connected with the employees
productive effort, performance, service or sacrifice”. According to Werther and Davis, “Fringe embrace a
broad range of benefits and services that employees receive as part of their total compensation, package pay
or direct compensation and is based on critical job factors and performance”.
According to Cockman, “ Employee benefits are those benefits which are supplied by an employer to or for
the benefits of an employee and which are not in the form of wages, salaries and time rated payments”.
These are indirect compensation as they are extended condition of employment and are not related to
performance directly.
Kinds of Fringe Benefits
1) Old Age and Retirement Benefits - these include provident fund schemes, pension schemes, gratuity and
medical benefits which are provided to employee after their retirement and during old age as a sense of
security about their old age.
2) Workman’s Compensation - these benefits are provided to employee if they are got ignored or die under
the working conditions and the sole responsibility is of the employer.
3) Employee Security- Regular wage and salary is given to employee that gives a feeling of security. Other
than this compensation is also given if there is lay-off or retrenchment in an organization.
4) Payment for Time Not Worked – Under this category of benefits, a worker is provided payment for the
work that has been performed by him during holidays and also for the work done during odd shifts.
Compensatory holidays for the same number in the same month are given if the worker has not availed
weekly holidays.
5) Safety and Health – Under this benefit workers are provided conditions and requirements regarding
working condition with a view to provide safe working environment. Safety and Health measures are also
taken care of in order to protect the employees against unhealthy working conditions and accidents.
6) Health Benefits – Employees are also provided medical services like hospital facility, clinical facility by the
organization.
ypes of Fringe Benefits
The benefits are explained below:
Category I: Fringe benefits which are required by law
 These benefits are mandated by the federal government, considering the importance and need of
these benefits to the employees.
 Such benefits are medical support, financial support, retirement benefits, insurance benefit,
unemployment insurance, etc.
 The basic intent behind such benefits is that these are life-saving & life-supporting benefits.
 Due to the provision in labor laws, these benefits are required to be provided by each business entity.
Category II: Voluntary benefits
 These benefits are not mandated by law but are given out of courtesy by the employer at his
discretion.
  The moral intent behind such benefits is giving personal space to employees, letting them grow within
the organization, helping them generate finance for the future, etc.
 Since these benefits are voluntary, many are taxable with certain exemptions.
 Examples of voluntary benefits include employee stock options, educational support, leave salary,
rent-free accommodation, investment advisory, free laptop, etc.
Fringe Benefit Tax
 Coming from the tax perspective, there is no free lunch. The IRS considers fringe benefits as part &
parcel of employee compensation & thus, these benefits are taxable in nature.
 Not all benefits are taxable. IRS specifies three categories of benefits viz., non-taxable benefits,
partially taxable benefits & tax deferred benefits.
 For paying tax, we need to know the value of the benefit multiplied by the tax rate. Tax rate is
specified by the IRS but the real task lies in valuing the benefits.
 The valuation is majorly based on the fair value principle.
 In a few instances, the IRS allows the value to taxes as fair value less than the amount recovered from
employees.
 A few of the non-taxable benefits are listed below:
1. Retirement contributions
2. Employee stock options
3. Education assistance up to the certain limit
4. Discounts from retail-employer
5. Meals
6. Conveyance expense
7. Amenities provided by the employer
Advantages and Disadvantages of Fringe benefits
Advantages
 Fringe benefits motivate the employee. Motivation leads to more work in a lower time frame, saving
the cost of an organization.
 The health of the employees is assured. Health employees are productive in their work.
 Fringe benefits show the caring approach of the employer towards the employees. It increases the
self-image of the organization.
 It reduces employee turnover and increases loyalty to work.
 Due to education support, the knowledge base of the employee increases. The employer can give the
employees the task related to newer skills acquired by them. This, lets the employer earn from no
additional cost of hiring new people.
Disadvantages
 Some employees need a larger cash salary than the combination of salary + benefits. Such employees
do not stay for long with the organization.
 For managing the equal flow of benefits within the organization, administrative costs increase to that
extent.
 Few benefits are compulsion by law & thus any non-compliance leads to paying of fines and penalties
to the government. Thus, for the sake of compliance with labor-laws, the cost of a professional expert
is also to be borne by the employer.
 Fringe benefits are standardized in nature. Customization is difficult given the big mob of the
organization and thus, you cannot keep each employee satisfied.
 For a few organizations, the cost of providing fringe benefits is also high. The employer needs to cover
up the cost through an increase in revenue or selling price of his products.

Allowance
Any monetary benefit offered by the employer to its employees for meeting expenditures, over and above
the basic salary are known as Salary Allowances.

Allowances are the financial benefit given to the employee over and above the monthly salary. Allowances
are particular in nature and are provided to meet the specific requirements of employees.

According to Income Tax Act, 1961, allowances are added to the salary of an individual and taxed under the
head Income from Salaries. The salary allowances can be divided into three categories, taxable, non-taxable
and partly taxable allowances.

allowances are broadly divided into three categories

A. Taxable Allowance

Taxable allowances are those allowances which are part of salary and are not exempted under any section of
Income Tax Act. These are taxed as per the tax slab of the employee. Here are few commonly known taxable
allowances:

1. Dearness Allowance: Dearness Allowance is mostly paid to employees over the basic salary to
manage inflation and as an adjustment towards the cost of living expenses. The income tax act clearly
mentions that tax liability for Dearness Allowance will be calculated along with salary. Therefore, one
must declare the same while filing income tax returns.
2. Entertainment Allowance: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance
only to a Government employee and in case of non-government employees entertainment allowance
is completely taxable.

Entertainment allowance received is fully taxable and is first to be included in the salary and
thereafter the following deduction is to be made from gross salary:

The amount of deduction will be lower of:

o One-fifth of his basic salary or

o 5,000 or
o Entertainment allowance received.

Amount actually spent by the employee towards entertainment out of the entertainment allowance
received by him is not a relevant consideration at all.

3. Medical Allowance: This allowance is paid for the medical expenses incurred by the employee. this
allowance is fully taxable.
4. Overtime Allowance - Employees who work beyond their regular shifts may receive an overtime
payment from their employers. This is referred to as overtime and any compensation received is fully
taxable.
5. City Compensatory Allowance - This payment is made to employees who work in urban areas that
may be quite expensive in order to help them cope with the excessive expense of living there. It is
taxable irrespective of the fact whether it is given as compensation for performing his duties in a
particular place or under special
6. Interim Allowance - Any interim allowance given by an employer in place of a final allowance is
completely taxed.
 7. Project Allowance - When an employer pays an employee's project-related expenses out of an
allowance, that income is completely taxable.
8. Tiffin/Meals Allowance- When employer pays for employee’s tiffin/meals that is entirely taxable.
9. Cash Allowance - When an employer offers a cash allowance, such as one for a wedding, a funeral, or
a holiday, it is fully taxable.
10. Non-Practicing Allowance – this allowance is given to doctors who provides their employer a
certificate that they are not working in any self practice. This allowance is generally 20% of basic
salary and dearness allowance.
11. Warden Allowance - When an employer provides a stipend to a worker serving as a Warden, or
Keeper, at a school, the stipend is completely taxable.
12. Servant Allowance - When an employer pays a worker to use a servant's services, that allowance is
considered as taxable income.
13. Transport allowance - Transport allowance granted to an employee to meet his expenditure for the
purpose of commuting between the place of his residence and the place of his duty is fully However,in
case of blind/ deaf and dumb/ orthopedically handicapped employees exemption upto 3,200 p.m. is
provided under section 10(14).
14. Other Taxable allowances - Telephone Allowance, Holiday allowance, and so on.

B. Non-Taxable Allowance

These allowances are part of the salary, however, are fully exempt from tax, which means while computing
tax these are deducted from the salary. Here are few commonly known fully exempted allowances:

1. Uniform Allowance: Any allowance granted to meet the expenditure on the purchase or maintenance
of uniform for wear during the performance of the duties of an office or employment of This is
exempted to the limit of the actual amount spent on the expenses.
2. Allowances Paid to Government Employees Abroad - Allowances or perquisites paid or allowed as
such outside India by the Government to a citizen of India for services rendered outside India are
exempt from tax
3. Allowances Paid to UNO Employees - Allowance paid by the UNO to its employees is not taxable by
virtue of section 2 of the United Nations (Privileges and Immunities) Act,
4. Allowances Judges of the High Court and Supreme Court - Any allowance paid to a Judge of a High
Court and Supreme Court is not taxable.
5. Compensatory Allowances - Compensatory allowance received by judge under Article 222(2) of the
Constitution is not taxable since it is neither salary not
6. Sumptuary allowance- Sumptuary allowance given to High Court Judges under section 22C of the
High Court Judges Act, 1954 is not chargeable to tax.
7. Helper Allowance - Helper Allowance is the allowance granted to an employee to meet the
expenditure incurred on a helper when such helper is engaged for performing official duty.
8. Other Tax Free Allowances – Daily Allowance, Academic / Research Allowance, Conveyance
allowance, Allowances paid to government employee posted outside India, Compensatory Allowances
paid to Judges, and Travelling Allowance, and so on.

C. Partially Taxable Allowances

These allowances are exempt from tax to a certain limit as instructed in the income tax act. Here are few
commonly known partially taxable allowances:
1. House Rent Allowance - HRA is a special allowance specifically granted to an employee by his
employer towards payment of rent for residence of the As per the Sec 10 (13A), the least of the
following is exempted, and rest amount is taxable.
o Actual HRA received
o Rent Paid – 10% (Basic salary + DA)
o 40% of salary ( basic + DA) and 50% in metro cities like Mumbai, Kolkata, Delhi, or Chennai)

Exemption is not available to an assessee who lives in his own house, or in a house for which he has
not incurred the expenditure of rent.

2. Children Education Allowance - This allowance is granted towards the expenses incurred on a child’s
education. This is exempted up to Rs. 100 per month per child up to a maximum of 2 children.
3. Hostel Expenditure Allowance - This allowance is granted to employees for the expenses incurred on
the hostel fees of their child. This is exempted up to Rs. 300 per month per child up to a maximum of
2 children.
4. Transport allowance - Any transport allowance granted to an employee who is blind or deaf and
dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his
expenditure for commuting between his residence and place of duty is exempt upto rs 3200 per
month.
5. Allowance given to an employee in the transportation industry - Allowance given to an employee in
the transportation industry to cover personal expenses while performing duties related to the
operation of such transportation from one location to another, if the employee is not receiving the
daily allowance.

Amount of exemption shall be lower of following:

70% of such allowance; or

Rs 10,000 per month.

6. Special Allowance - Special Allowance is a allowance granted to the Employees to meet certain
expenses. The expenses must be incurred against which such allowance is given to the employee.
7. Underground Allowance- This allowance is granted to an employee who is working in uncongenial,
unnatural climate in underground mines is exempt upto 800 per month.
8. Conveyance Allowance Exemption Limit - Conveyance allowance refers to the compensation
provided by the employer to the employee for travelling to and from the workplace. Taxes are not
due on the allowance up to a monthly cap of INR 1600. According to the Income Tax Act, taxes will be
due on any sums received in excess of INR 1600.However, with the amendment coming in Budget
2018, tax exemption on conveyance/transport allowance has been replaced and included in the
Standard Deduction allowed. Therefore, no separate exemption will be allowed for
conveyance/transport allowance from FY 2018-19 onwards.
9. Leave Travel Allowance- You are eligible to claim exemption for LTA if you are going on a vacation
subject to exemption limit as specified under the Income Tax Act, 1961. This exemption applies to the
employee's when the journey is performed by rail, aircraft, or bus. The exemption is as below

1. If travel by Air: Maximum exemption shall be economy fare calculated by the airlines
considering shortest route to the Destination.
2. Where place of origin and destination is connected by Railways and the Journey is performed
between such places : Maximum exemption shall be not more than air-conditioned first class
rail fare by the shortest route.
 3. Where place of origin and destination is not connected by Railways : In case recognized public
transport exist, maximum exemption will be of amount not exceeding first class fare of such
transport by shortest route. In case recognized public transport does not exist, amount equal
to air conditioned first class rail fare.

This exemption does not apply to any additional local transportation, sightseeing, hotel
accommodations, meals, or other expenses. The lower of the two exemptions will be allowed:

o The employer provides LTA.

o Exemption based on expenses incurred or the applicable amounts subject to the conditions
covered above for each method of transportation.
2. Medical Allowance - Medical allowance is a part of the salary, exactly like dearness allowance. It is
totally taxed.

Medical reimbursement is a refund of the employee's or his family's medical expenses. The exemption
amount will be the lesser of the two;

However, with the amendment coming in Budget 2018, tax exemption on medical reimbursement has
been replaced and included in the Standard Deduction allowed. Therefore, no separate exemption
will be allowed for Medical Reimbursement from FY 2018-19 onwards.

3. Car maintenance allowance - If an employee uses a company's car and the company repays the
driver's wage, insurance, maintenance, and fuel expenses, the taxable value is Rs 2,700 per month
(cars with cubic capacity within 1.6 Litre) or Rs 3,300 per month (cars with engines over 1,600 cc) (car
with cubic capacity exceeding 1.6 Litre).

An exemption of Rs 2,700 per month or Rs 3,300 per month in respect of the driver salary, maintenance, and
fuel expenditures paid and refunded by the employer if the employee owns the car.