How to Create a Salary Structure in India: A Practical Guide

Knowing how to create a salary structure is a core skill for founders, HR managers and CAs who set up payroll for Indian companies. A good structure does four jobs at once: it complies with the Labour Codes (in particular the Code on Wages 50% rule), it keeps statutory costs predictable, it lets employees use whatever tax benefits their regime allows, and it can be explained in a two-minute conversation. This guide walks through the components, the rules for sizing each, a fully worked ₹9 lakh CTC example, and templates for different salary bands.

Principles of a Good Salary Structure

• Compliance first: basic plus DA should be at least 50% of total remuneration, and gross must not fall below applicable minimum wages.
• Predictable cost: employer PF, ESI and gratuity should be computed from the structure, not negotiated case by case.
• Tax flexibility: include components that help old-regime employees (HRA, LTA) without disadvantaging new-regime employees.
• Simplicity: five to seven components is usually enough. Every extra allowance needs a rule, a proof and an explanation.
• Consistency: employees at the same grade should have the same proportions, so differences come from pay level, not structure.

The Building Blocks

Component	Typical sizing	Statutory relevance	Tax treatment
Basic (plus DA where applicable)	50% of gross or more	Base for PF, gratuity, bonus	Taxable
HRA	40% to 50% of basic	Excluded from wages (subject to 50% rule)	Partly exempt in old regime only
LTA	Fixed annual amount	Excluded as travel concession	Exempt for two journeys in a block, old regime only
Special allowance	Balancing figure	Treatment for the 50% test needs a documented view	Taxable
Employer PF	12% of PF wages (capped or actual)	Statutory	Exempt within limits
Employer ESI	3.25% of gross, if gross is ₹21,000 or less	Statutory	Not taxable to employee
Gratuity provision	4.81% of basic plus DA	Statutory benefit	Exempt within limits when paid
Employer NPS (optional)	Up to 14% of basic plus DA	Voluntary	Deductible in both regimes within limits
Variable pay	Percentage of CTC by grade	Usually excluded as bonus or incentive	Taxable when paid

Step-by-Step: Building the Structure

1. Fix the CTC and split it into fixed and variable.
2. Decide employer-side items inside CTC: employer PF (and whether capped), gratuity provision, insurance, employer NPS.
3. Derive gross salary as fixed CTC minus those items.
4. Set basic at 50% of gross or slightly above, rounded to a clean number.
5. Set HRA at 40% or 50% of basic.
6. Add LTA or other reimbursement-type components if your policy offers them.
7. Make special allowance the balancing figure.
8. Recompute employer items that depend on basic (gratuity, uncapped PF) and iterate until CTC balances.
9. Test against the 50% rule and minimum wages, and estimate net pay under both regimes.

Worked Example: ₹9 Lakh CTC

Annual fixed CTC: ₹9,00,000, that is ₹75,000 a month. Employer PF capped at ₹15,000. Gratuity provision and a group health premium of ₹500 a month are included in CTC.

Iteration

Start with basic of ₹36,000. Gratuity provision = 4.81% × ₹36,000 = ₹1,731.60, rounded to ₹1,732. Employer PF = ₹1,800. Gross = ₹75,000 minus ₹1,800 minus ₹1,732 minus ₹500 = ₹70,968. Basic is 50.7% of gross, so the 50% test is met. HRA at 40% of basic = ₹14,400. Special allowance = ₹70,968 minus ₹36,000 minus ₹14,400 = ₹20,568.

Final structure

Component	Monthly (₹)	Annual (₹)
Basic	36,000	4,32,000
HRA	14,400	1,72,800
Special allowance	20,568	2,46,816
Gross salary	70,968	8,51,616
Employer PF	1,800	21,600
Gratuity provision	1,732	20,784
Group health insurance	500	6,000
CTC	75,000	9,00,000

Why not basic at ₹35,000?

With basic of ₹35,000, gratuity is ₹1,684 and gross is ₹71,016. Half of gross is ₹35,508, so excluded items (₹36,016) would exceed 50% by ₹508, triggering an add-back. Rounding basic up to ₹36,000 avoids the add-back and keeps payroll logic simple.

Net pay

Employee PF ₹1,800 and professional tax (say ₹200) leave ₹68,968 before TDS. Under the new regime, annual gross of ₹8,51,616 minus ₹75,000 standard deduction gives ₹7,76,616, which is within the ₹12 lakh rebate range, so TDS is nil. Monthly take-home: about ₹68,968. For more on how these numbers relate, see CTC vs gross vs net salary.

Templates by Salary Band

Band (monthly gross)	Basic	HRA	Other	Notes
Up to ₹21,000	50% to 60% of gross, not below minimum wage	20% to 40% of basic	Small special allowance	ESI applies; PF usually on actual since wages are below ₹15,000
₹21,000 to ₹60,000	50% of gross	40% of basic	Special allowance; optional LTA	Decide PF cap policy; check PT slab
₹60,000 to ₹2,00,000	50% of gross	40% to 50% of basic	LTA, optional employer NPS	Employer NPS is valuable under the new regime
Above ₹2,00,000	50% of gross	50% of basic	Employer NPS, variable pay	Watch the ₹7.5 lakh limit on employer retirement contributions

Flexible Benefit Plans

A flexible benefit plan (FBP) lets employees allocate part of the special allowance to tax-efficient components such as LTA, meal cards, telephone and internet reimbursement, or fuel reimbursement. Because most of these exemptions are available only under the old regime, FBP is less valuable now that the new regime is the default. If you keep it, allow a default allocation to taxable special allowance and let employees opt in.

Common Structuring Mistakes

• Basic below 50% of gross after 21 November 2025, creating hidden add-backs.
• Gross below the applicable minimum wage for the employee's skill category and state.
• Including employer ESI in CTC without a plan for when the employee crosses ₹21,000.
• Too many allowances with no proof process, which become fully taxable anyway.
• Different structures for employees in the same grade, which leads to pay equity questions.
• Not modelling net pay under both regimes before rolling out.
• Forgetting the gratuity provision when budgeting CTC.

Reviewing the Structure Every Year

1. Check new tax slabs, rebates and standard deduction in the Finance Act.
2. Check minimum wage revisions (usually April and October).
3. Check changes to PF, ESI or Labour Code rules.
4. Re-run the 50% test after increments.
5. Review the PF cap policy and the use of employer NPS.
6. Update offer letter templates and salary templates in payroll.

Worked Example: Converting an Old Structure

Many companies still carry structures built when basic was kept low. Consider a monthly gross of ₹60,000 with basic ₹18,000 (30%), HRA ₹9,000 and special allowance ₹33,000. The company wants basic at 50%: basic ₹30,000, HRA ₹12,000, special allowance ₹18,000, with CTC unchanged.

If PF is capped at ₹15,000

• Employer and employee PF stay at ₹1,800, since basic was already above ₹15,000.
• Gratuity provision rises from 4.81% × ₹18,000 = ₹866 to 4.81% × ₹30,000 = ₹1,443, an increase of ₹577.
• To keep CTC fixed, gross falls by ₹577, so take-home falls by ₹577 a month.

If PF is on actual wages

• Employer PF rises from ₹2,160 to ₹3,600 (+₹1,440), and gratuity provision rises by ₹577.
• Gross must fall by ₹2,017 to keep CTC fixed.
• Employee PF also rises by ₹1,440.
• Take-home falls by ₹2,017 + ₹1,440 = ₹3,457 a month, while the employee's PF account receives ₹2,880 more each month.

Showing employees both sides of this trade (lower take-home, higher retirement savings and gratuity) makes the change easier to accept. The legal background is in our guide to the Code on Wages 50% rule.

Structures for Different Types of Workers

Interns and trainees

Interns paid a stipend under a genuine internship are usually outside the regular salary structure. Apprentices engaged under the Apprentices Act have their own stipend rules. If a "trainee" is in practice an employee doing regular work, treat them as an employee with a full structure, PF and ESI.

Fixed-term employees

Under the Labour Codes, fixed-term employees must receive the same wages, allowances and benefits as permanent employees doing the same or similar work, and gratuity after one year. Use the same templates as permanent staff of the same grade.

Consultants and retainers

Independent consultants are paid professional fees against invoices, not salary, with TDS under the provisions for fees rather than salary. If a consultant works like an employee (fixed hours, supervision, integration into the team), the arrangement may be treated as employment, with PF, ESI and salary TDS consequences.

Salary Templates in Fininvo Payroll

Fininvo Payroll supports configurable salary components, salary templates, flexible benefit plans and CTC structuring, so a structure defined once can be reused for every offer and payroll run. See salary structure features, Fininvo Payroll and pricing.

Frequently Asked Questions

What percentage of CTC should basic salary be?

Under the Code on Wages, basic plus DA should be at least 50% of total remuneration. Many employers set basic at about 50% of gross, which is somewhat below 50% of CTC.

Is HRA mandatory in a salary structure?

No. HRA is not mandatory, but it is useful for old-regime employees who pay rent, and it is a familiar component employees expect.

Should employer PF be part of CTC?

It is common practice in India. Whatever you choose, show it clearly in the offer letter.

How often should a salary structure be reviewed?

At least once a year, before the new tax year, and whenever labour or tax laws change.

Is this legal or tax advice?

No. This is general information. Confirm treatment of components and current limits with a qualified professional.