Mandatory Components HR Must Include in CTC Structure (As per Indian Compliance)
When structuring Cost to Company (CTC), HR must ensure compliance with various Indian labor
laws, tax regulations, and statutory contributions. Below are the mandatory components that must
be included:
1. Fixed Salary Components (Mandatory in CTC)
Component Description Compliance Rule
Basic Salary Fixed monthly pay (40-50% of CTC). Fully taxable under IT Act.
Dearness Allowance Paid to government/public sector Part of Basic Pay; mandatory for
(DA) employees to adjust for inflation. some industries.
House Rent Provided for accommodation expenses Partially exempt under Section
Allowance (HRA) (typically 40-50% of Basic). 10(13A).
Special Allowance Extra pay apart from other components. Fully taxable.
Conveyance Merged with Standard Deduction
Given for transportation.
Allowance (₹50,000 per year).
2. Statutory Deductions & Contributions (Mandatory as per Indian Law)
Employer Employee
Component Compliance Rule
Contribution Deduction
12% of Basic 12% of Basic Mandatory if Basic ≤ ₹15,000/month (EPF
Provident Fund (PF)
Salary Salary Act, 1952).
Employee State 3.25% of Gross 0.75% of Gross Mandatory if Gross Salary ≤
Insurance (ESI) Salary Salary ₹21,000/month (ESI Act, 1948).
Applicable in some states (e.g.,
₹200
Professional Tax (PT) Not applicable Maharashtra, Karnataka, West Bengal,
max/month
etc.).
Labour Welfare Fund Mandatory in certain states (e.g.,
Varies by state Varies by state
(LWF) Maharashtra, Karnataka, Tamil Nadu).
4.81% of Basic Mandatory if service ≥5 years (Payment of
Gratuity Not deducted
Salary Gratuity Act, 1972).
As per Income
Income Tax (TDS) Not applicable Deducted under Section 192 of the IT Act.
Tax Slab
3. Other Mandatory Employee Benefits
Benefit Applicability Legal Requirement
Every company must provide paid As per Shops & Establishments Act of
Leave Policy
leaves. the respective state.
Bonus (if For employees earning Basic Salary ≤ Mandatory under Payment of Bonus
applicable) ₹21,000/month. Act, 1965 (8.33%-20% of salary).
Female employees with 80+ days of Mandatory under Maternity Benefit
Maternity Benefit
work in the last 12 months. Act, 1961 (26 weeks of paid leave).
Minimum Wages All employees must be paid as per As per Minimum Wages Act, 1948
Compliance government minimum wage rules. (varies by state and job category).
Gratuity Eligibility If employee works for 5+ years. Mandatory under Gratuity Act, 1972.
4. Sample Compliant CTC Structure (Example for ₹10 Lakh CTC)
Monthly Amount Yearly Amount
Component Taxability
(₹) (₹)
Basic Salary (50% of CTC) ₹41,667 ₹5,00,000 Fully Taxable
House Rent Allowance (HRA - 50% of
₹20,833 ₹2,50,000 Partially Exempt
Basic)
Special Allowance ₹8,333 ₹1,00,000 Fully Taxable
Employer’s PF Contribution (12% of
₹5,000 ₹60,000 Exempt (Under 80C)
Basic)
Employer’s ESI Contribution (if
₹0 ₹0 Exempt
applicable)
Exempt (if service ≥ 5
Gratuity (4.81% of Basic) ₹2,000 ₹24,000
years)
Bonus (if applicable) ₹5,000 ₹60,000 Fully Taxable
Gross Salary ₹83,833 ₹10,00,000 -
Employee’s PF Contribution (12% of
(-₹5,000) (-₹60,000) Exempt (Under 80C)
Basic)
Professional Tax (varies by state) (-₹200) (-₹2,400) Fully Taxable
Income Tax Deduction (TDS) (-As per slab) (-As per slab) Fully Taxable
₹(After ₹(After
Net Take-Home Salary -
Deductions) Deductions)
5. Legal Considerations HR Must Follow in CTC Design
✅ 1. Compliance with Provident Fund Act
Mandatory PF deduction if Basic ≤ ₹15,000/month.
Employees can opt out if salary is above ₹15,000.
✅ 2. ESI Contribution (Mandatory for Low-Income Employees)
If gross salary ≤ ₹21,000/month, ESI is mandatory.
Not applicable if salary is above ₹21,000/month.
✅ 3. Payment of Bonus Act (Mandatory for Low-Income Workers)
Applicable if Basic Salary ≤ ₹21,000/month.
Minimum 8.33% bonus must be paid.
✅ 4. Compliance with Gratuity Act
HR must calculate gratuity as 4.81% of Basic Salary.
It must be paid after 5 years of service.
✅ 5. Compliance with Minimum Wages Act
Every employee must get at least minimum wage as per state laws.
Varies by state & industry (e.g., Karnataka, Maharashtra, Delhi).
6. CTC vs Gross Salary vs Net Salary
Term Definition
Total amount company spends on an employee, including salary and
CTC (Cost to Company)
benefits.
Gross Salary CTC minus employer's PF, gratuity, and other benefits.
Net Salary (Take-Home
Gross Salary minus employee deductions (PF, tax, etc.).
Pay)
7. Best Practices for HR in CTC Structuring
✅ Balance between Basic Salary & Allowances – Keep Basic at 40-50% to optimize tax benefits.
✅ Ensure Statutory Compliance – Follow PF, ESI, Bonus, and Gratuity Act rules.
✅ Maximize Employee Benefits – Include HRA, LTA, Sodexo, Insurance for tax savings.
✅ Clearly Mention Deductions in Offer Letter – Avoid confusion by listing all salary components
separately.
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