Introduction

Once you understand the structural logic of Gross, Fixed Salary, and CTC, the next step is to understand the individual salary components that make up a comprehensive Indian salary package.

Each component exists for a reason — legal compliance, tax optimization, or employer flexibility.
This article breaks down every major salary component, how it’s calculated, and how it interacts with the rest of the salary structure.

1. Primary Salary Components

Basic Salary

Basic Salary is the foundation of the salary structure.

• Typically 40% of Gross (but varies by employer)
• Drives PF, ESIC, Bonus applicability
• Often kept high in compliance-driven industries
• Sometimes kept low in take-home-focused companies

A higher Basic improves social security but reduces take-home due to PF.

House Rent Allowance (HRA)

HRA supports employees living in rented accommodation.

• Usually 50% of Basic in metro cities
• 40% in non-metro
• Tax exemption available based on rent paid
• Sometimes used as a balancing number when Special Allowance becomes negative

HRA gives employees a significant tax benefit when structured correctly.

Conveyance Allowance

A fixed allowance for commuting.
Though the fixed tax-exempt conveyance allowance was removed under the new regime, companies still use it as an allowance head for internal structuring.

Medical Allowance

A fixed allowance to support medical expenses.
Previously exempt but now treated as taxable under the new regime.
Still widely used as a component for structure consistency.

Leave Travel Allowance (LTA)

Reimbursement-based allowance for travel during approved leave.

• Exemption allowed for domestic travel only
• Can be claimed twice in a block of four years

Common in mid-to-large companies offering tax optimization.

Special Allowance (SA)

This is the balancing number of the salary structure.
Once Basic, HRA, LTA, and other components are added, Special Allowance adjusts the total to match the agreed Gross Salary.

If SA becomes negative, employers may:

• Reduce HRA
• Re-allocate allowances
• Adjust Basic (rare)

It is the most flexible component in Indian salary design.

2. Statutory and Compliance-Driven Components

Minimum Wage

Every employer must ensure the Basic + DA meets the state-specific minimum wage for the role, skill, and zone.
This requirement often forces companies to keep Basic higher than they otherwise would.

Statutory Bonus

Mandatory for employees earning below the statutory wage threshold.

• Minimum 8.33% of annual eligible salary
• Maximum 20%
• Paid annually

This component is compliance-driven, not employer-choice.

Provident Fund (PF)

One of India’s core social security schemes.

• Employee: 12%
• Employer: 12%
• Calculated on Basic + certain allowances
• PF base can be restricted to ₹15,000 by some employers

PF reduces take-home but increases long-term savings and benefits.

Employee State Insurance Corporation (ESIC)

Medical and social protection for employees below the wage threshold.

• Employee: 0.75%
• Employer: 3.25%
• Mandatory below the ESIC ceiling

ESIC is applicable only to eligible employees; others are excluded.

Professional Tax (PT)

State-wise employment tax deducted from employee salary.

• Amount varies by state
• Capped at around ₹200 per month in most states

Only the employee contributes; the employer remits.

3. How Components Interact With Each Other

• Basic affects PF, Bonus, and HRA
• HRA affects tax exemption
• Special Allowance balances the structure
• PF reduces take-home but increases social security
• ESIC is applicable only below a threshold
• Minimum wage rules can override company preferences
• Bonus applicability depends on Basic + DA
• LTA provides tax benefit via reimbursement

Understanding these interactions helps employees and employers avoid misinterpretation or incorrect structuring.

4. The Balancing Number Explained

The “balancing number” is used because salary structures are rarely symmetrical.

Example:
If Basic + HRA + LTA + Conveyance already consume most of the Gross, the remaining portion becomes Special Allowance.

If Special Allowance accidentally becomes negative, employers typically adjust:

• HRA, or
• Another allowance, or
• Component percentages

This ensures the salary structure remains compliant and mathematically balanced.

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Conclusion

Salary components in India serve purposes ranging from legal compliance to tax optimization and structural flexibility.
By understanding how each component works — Basic, HRA, Special Allowance, PF, ESIC, PT, LTA, and more — you can interpret any offer letter confidently and evaluate whether a company follows a transparent, inflated, compliant, or take-home-focused approach.

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If you’d like the bigger-picture view — why companies design salary structures differently and what that signals — read this → Understanding Salary Structure in India: Why Companies Do It Differently • Klimb