Basic Salary - Meaning, Calculation and Key Factors

What is Basic Salary?

The basic salary is that part of the employee's salary that is completely fixed. It does not include any type of benefits, bonuses, perks, allowances, or any other type of compensation given by the employer.

It is generally decided based on the designation of the employee. The basic salary remains fixed until it is increased based on the performance of the employees.

The basic salary is a predictable and fixed source of income for all employees. It is also a major part of the taxable income of an employee.

How to calculate Basic Salary?

The basic salary calculation can be done after deducting all the other components from the gross salary, such as allowances, bonuses, benefits, etc. One more thing to remember is that the compensation money for the overtime work is not included in the basic salary.

Gross salary is the total salary, including all the components of the salary, like bonus, benefits, allowances, etc. So, if you want to calculate the basic salary, then you have to deduct the amount of all these components from your gross salary.

The basic salary calculation formula is:

Basic salary = Gross salary - ( all the benefits + allowances + bonuses, etc.)

Let's take an example to understand: Mr Amit has a gross salary of Rs 10,00,000, in which the bonus amount is Rs 1,50,000, the allowance amount is Rs 1,00,000, and the overtime amount is Rs 50,000. Now, calculate the basic salary of Mr. Amit using the above formula.

Basic Salary = 10,00,000 - (1,50,000 + 1,00,000 + 50,000)

Basic Salary = Rs 7,00,000

Percentage of Basic Salary

Generally, in most organizations, the basic salary percentage is 50% of the CTC (cost to company). There are many factors that are calculated on the basis of the percentage of the basic salary, such as gratuity, HRA, etc. So, it is important that the basic salary is at least 50% of the cost to the company.

Factors that affect Basic Salary

Here are the following factors that can affect the basic salary of an individual:

• Policies of the Company: Each of the companies has different policies for its pay scales. It mainly depends on the designation and skill set of the employee.
• Location: The location of the company is an important criterion in deciding the salary of an individual. Demand and Supply for employees can vary region to region.
• Industry: The salary of the employee can vary according to the industry. In industries where the demand is less, the salary would be higher.
• Experience: The experience of the individual for a particular job role is an important criterion to decide his/her salary. If you have more experience, then your salary will be higher.

Additions to Basic Salary

Generally, there are many components that are added to the basic salary, they are:

• Bonus
• Commission
• Allowances like house rent allowance, dearness allowance, etc.
• Perquisites
• Overtime pay
• ESOP (Employee Stock Options)

Different Components of Salary

There are different components of the salary structure, and here they are:

• Basic Salary: Basic salary means the fixed component of the structure of the salary. It is that part of the salary that is guaranteed for the employee. There are no bonuses or allowances added to this salary. The basic salary is mostly used as the base to which the other benefits are calculated.
• Bonus: When an employee achieves a target or a goal, then he is given a one-time payment as a bonus to his salary. The examples of the bonuses include performance bonus, annual bonus, and sign-on bonus.
• Allowances: Allowances are the type of additional benefits that are offered to employees to cover their specific expenses. Examples are House rent allowance, medical allowance, dearness allowance, etc.
• Perquisite: It includes some extra benefits which are added to the amount for the services rendered. In recent times, employees' salary packages include the perquisites in the form of a car, house, accommodation, etc.
• Stock Options: They are given to the employees by their company in the form of compensation. It gives an opportunity to the employees to buy some shares of the company at a pre-determined price, which is usually lower than the market price.
• Retirement Benefits: They include the benefits that are given to employees at the time of their retirement. They are leave encashment (exchange of leaves for cash at the time of retirement), retirement gratuity, and the amount collected in their provident funds throughout their service.