HR & Payroll Glossary

What Is Basic Salary? Definition, Formula & Income Tax

Basic Salary – Definition

Basic salary is a fixed amount to be paid to an employee addition of any allowances or subtraction any deductions. Bonuses, overtime, dearness allowance, etc are not a part of basic pay. It is a part of your take-home amount.

For an home-based employee, allowances such as internet and phone usage will also be added to their basic salary. It ranges from 40% to 50% of the total CTC.

It is the base of your pay structure. Other components of your total pay are calculated depending on your basic pay. These components include Annual Gratuity, Employee Contribution to Provident Fund or ESIC are determined according to your basic.

Annual basic is the monthly basic pay multiplied by twelve months.

Annual Basic = Monthly Basic X 12

Formula To Calculate Basic Salary

There is no fixed formula to Calculate Basic. Depending on the above factors, the basic pay of an employee is calculated.

Usually, it is 40% of the Gross Pay or 50% of the CTC.

Let us understand with a simple example.

Let us assume that Manoj’s Gross Pay is Rs. 35,000. Based on the above metrics, Manoj’s basic will be Rs. 15,000. If Manoj’s CTC is 48000 and if we calculate based on his 50 % of CTC then his basic will be Rs. 24,000.

Factors That Define Basic of an Employee

  • Country
  • Industry
  • Company
  • Designation of the Employee
  • HR Policies of the Company

How To Calculate Basic from Gross Pay?

Gross pay is the amount of salary including allowance but excluding the deductions.

Gross Pay =  Basic + DA + HRA + Conveyance + Medical + Other

Hence, to calculate your basic from the gross pay you need to do the reverse calculation. You need to subtract the allowance from the total gross pay.

Basic = Gross Pay – DA – HRA – Conveyance – Medical – Other

Otherwise, if your contract mentions the percentage you can do that directly using the following formula

Basic = Gross Pay X Percentage

We used this formula in the example of Manoj.

To calculate the take-home amount, you can use the Salary Sheet Excel Template.

Applicable Additions To Basic Salary

  1. Overtime
  2. Bonus
  3. Gratuity
  4. Tips

Applicable Deductions To Basic Salary

  1. Contribution to Pension
  2. Contribution to Salary Sacrifice Schemes
  3. Pay Reduction Due to Strikes
  4. Court Order Payments
  5. TDS
  6. Insurance Premiums

Tax Applicability

Income Tax is calculated based on the total take-home amount and not just basic. As it is a component of total salary, it is taxable. This is the reason companies don’t put basic higher than 40%-50% of CTC.

This is a minimal percentage. Taking basic lower will result in a decrease in the other components of the salary that are based on your basic. According to experts, Indian employees at a junior or middle level have a higher basic as compared to senior level.

Pros and Cons of Lower Basic Pay

Pros:

  • Less Tax Payable
  • Higher Savings
  • Less PF/ESIC Contribution Amount

Cons:

  • Lower Gratuity or end of service benefits
  • Less DA
  • Less Bonus

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Shabbir Bhimani

I have worked in Excel and like to share functional excel templates at ExcelDataPro.

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Shabbir Bhimani

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