Salary structure, decoded
CTC, gross, net; basic, HRA, special allowance: the vocabulary of Indian pay, what each piece does, and how the pieces pull against each other when you design or read a structure. By the end you should be able to decompose any offer letter, and design a structure that survives both an audit and a negotiation.
Rates and thresholds re-verified 27 July 2026. Statutory figures change by notification, so always confirm against the current official source before acting.
The three totals: CTC, gross, in-hand
CTC (cost to company) is everything employment costs the employer: gross salary plus employer PF, gratuity accrual, insurance premiums, sometimes even perquisites' cost. Gross is the employee-facing monthly figure before deductions: the payslip's top line. In-hand (net) is gross minus the employee's own deductions: their PF contribution, professional tax, income-tax TDS, and anything establishment-specific. The three can sit far apart, which is why an offer's annual CTC divided by twelve reliably disappoints. The honest mental model is CTC for the employer's budget, gross for the payslip, net for the bank account.
The components and what each one does
Basic is the anchor: PF contributions, gratuity and leave encashment all compute on it (plus DA where paid), so its size drives the statutory layer. DA (dearness allowance) is mostly a public-sector and wage-board concept but combines with basic wherever it exists. HRA funds housing and carries the old-regime tax exemption via the least-of-three rule. Special allowance is the balancing figure (whatever gross remains after the named components) fully taxable and statutorily inert on its own. Reimbursements (fuel, telephone, books) are expense-shaped and tax-treated per their rules; they belong outside the wage components. Employer PF and gratuity accrual live in CTC but never in gross.
The design tension, and what the Code on Wages did to it
Structures were long designed to minimise basic — shrinking PF outflow and gratuity accrual for both sides, with special allowance absorbing the balance. Two forces ended the era: the Supreme Court's view that universally paid allowances attract PF, and the Code on Wages' definition of wages, which effectively expects basic plus DA and retaining allowance to constitute at least half of total remuneration for computation purposes. Modern compliant structures run basic at forty to fifty percent of CTC and accept the statutory consequences, a change that quietly raised retirement savings for a generation of employees.
A sample ₹6,00,000 CTC, decomposed
| Component | Monthly | What it drives |
|---|---|---|
| Basic (40% of CTC) | ₹20,000 | PF base, gratuity accrual, leave encashment |
| HRA (50% of basic) | ₹10,000 | Old-regime exemption via least-of-three |
| Special allowance | ₹18,200 | Balancing figure; fully taxable |
| Employer PF (in CTC, not gross) | ₹1,800 | Retirement corpus; 12% on the ₹15,000 ceiling |
| Gross | ₹48,200 | The payslip top line |
| Employee PF + PT (typical) | − ₹2,000 | Statutory deductions |
| In-hand before income tax | ₹46,200 | What TDS then applies to |
One conventional decomposition, not a rule — gratuity accrual and insurance would sit in a fuller CTC statement. Run your own numbers in the salary calculator.
A worked example
Two offers, both ₹12,00,000 CTC. Offer A: basic ₹5,40,000 (45%), at-target bonus ₹60,000, employer PF and gratuity accrual inside. Offer B: basic ₹3,60,000 (30%), 'special allowance' dominant, ₹1,80,000 at-target bonus. A pays more into PF and gratuity and holds a smaller conditional slice; B shows a bigger monthly gross today, thinner statutory savings, and a fifth of the package contingent on targets, and its low basic invites the wage-definition questions modern audits ask. Same CTC, materially different offers; the decomposition, not the headline, is the comparison.
Figures are illustrative, for mechanism only. Verify current rates and your own structure before relying on any number.
Reading an offer letter like a payroll system
Decompose any offer into four questions. What is fixed versus variable: the at-target bonus inside CTC is a promise with conditions, not salary. What is the basic; it sets your PF outflow, gratuity accrual and the statutory seriousness of the structure. What sits in employer-side CTC; their PF, gratuity accrual and insurance are real value you never see monthly. And what the reimbursement components require — bills, caps, use-it-or-lose-it rules. Two offers with identical CTCs can differ by thousands a month in-hand purely on these four answers, before tax regime even enters.
Structures at scale: bands, not bespoke deals
Once a team passes a dozen people, per-person structures become a liability: every increment is a negotiation artifact, every payroll month a set of special cases. The scalable pattern is bands, a structure template per level, with salary moving inside the band and revisions applying by effect date. Bands make offers faster, make pay equity reviewable, and make payroll boring in the best sense: the engine applies one declared template per level instead of ninety private arrangements. The moment to adopt them is before the headcount that makes retrofitting painful.
What payroll systems actually store: the structure as contract
In a payroll engine, a structure is not a spreadsheet convention but a versioned object: components with their percentages, statutory flags marking what enters PF and ESI bases, effect dates on every revision, and the audit trail of who changed what. That formality pays in three currencies — offers generate from templates instead of precedent-hunting, statutory bases derive from declarations instead of interpretation, and any historical payslip can be explained by the structure that governed its month. When an auditor or a court asks why March 2027 paid what it paid, the answer is a version, not a recollection.
How payroll software applies this
In PeopleDeck, a structure is a declared object: components, percentages and statutory flags defined once, applied to every payslip with effect-dated revisions and computed arrears. The engine derives PF bases, HRA exemption data, PT and TDS projections from the same declaration, so the structure the offer letter promised and the structure payroll runs are, verifiably, the same thing.
Go deeper: Salary calculator · The payroll engine · Payslip format
Primary sources: Ministry of Labour & Employment · EPFO · Income Tax Department
Maintained by Databus Technology Solutions against the source notifications; the verification date above is refreshed whenever a figure changes. This guide explains rules and mechanics; it is not legal or tax advice. PeopleDeck applies statutory rates and generates upload-ready files; it never files returns on your behalf, and positions on contested questions belong with your consultant.
Frequently asked questions
What percentage of CTC should basic be?
Convention says 40-50%, and the Code on Wages' 50%-of-remuneration wage definition pushes toward the top of that band for computation purposes. Below that range, expect PF-inclusion questions on your allowances; above it, the structure simply pays more into the statutory layer.
Is HRA mandatory?
No component besides the statutory minimums is mandated — HRA exists because of its old-regime tax exemption and housing convention. An employee who opts for the new regime gets no HRA exemption, but the component itself is unaffected as pay.
Why is my in-hand lower than CTC ÷ 12?
Because CTC includes employer-side costs (their PF, gratuity accrual, insurance) that never reach gross, and gross then loses your PF, PT and TDS. On a typical structure, monthly in-hand runs 75-85% of CTC ÷ 12: the exact gap is what the salary calculator shows.
Can a structure change mid-year?
Yes, by agreement — restructures apply from an effect date, recompute PF bases and TDS projections forward, and generate arrears where backdated. What a structure cannot do is oscillate to game monthly thresholds; consistency is the compliance posture.
What are flexible benefit plans (FBP)?
Structures that let employees allocate a pool across tax-favoured components (meal cards, fuel, telecom) within policy. They live inside gross, shaped by each component's tax rule; their value depends heavily on the employee's regime choice.
Do variable pay and bonuses sit inside CTC?
Usually quoted inside CTC as a separate at-target line, which is why two equal CTCs can carry very different fixed pay. Read the fixed-versus-variable split before comparing offers; payroll pays the fixed monthly and the variable per its scheme.
What is a good structure for a small business starting out?
Keep it boring: 45-50% basic, HRA at half of basic, the balance as special allowance, statutory flags set honestly, and identical templates per level rather than per-person deals. A structure you can explain in two sentences survives audits, negotiations and growth; cleverness in structures ages badly.
Structures declared once, applied every month.
Applied on every payslip, files generated for upload — per employee, per month.
Start free