The India rewards market is unique. Due to the complexity and distinctive characteristics of India pay, it is sometimes challenging to establish or communicate compensation packages to employees in India as well as business leaders outside of the country. For rewards professionals, it is essential to know how various pay elements align to outside markets in order to make an accurate cross-country comparison of relative pay levels and truly understand human capital expenditures in India.
We’re going to break down the components of a common pay package in India so you can better understand, structure and manage your India rewards package.
India rewards packages begin with the "Cost to Company" (CTC) measurement. This includes all costs incurred by the company on behalf of the employee, both monetary and non-monetary before taxes. In short, CTC consists of fixed compensation, variable cash incentives and benefits. Importantly, the value of stock awards is typically outside of, and in addition to, the CTC.
An overview of rewards packages in India
Fixed compensation is the equivalent of "base salary" in other geographies. Fixed compensation and CTC are the most widely used external competitive pay benchmarks, with fixed compensation often the foundation for creating pay ranges. Instead of building up compensation elements, rewards packages in India are designed by starting with the targeted fixed compensation amount and then backing into the various components.
Here are the components of fixed compensation and how they are typically designed:
Basic Salary is generally set at 40% to 50% of fixed compensation, depending on the metro location. It is the largest component of fixed compensation fully taxable to the employee.
House Rent Allowance (HRA) can be claimed by employees as a tax exemption (up to 50% of basic salary in a metro city or up to 40% in a non-metro city) if the employee is living in rented housing.
Leave Travel Allowance (LTA) is for holiday travel within India. An employee can claim tax benefits for the fare expenses paid for his/her family when they take a holiday, subject to certain restrictions.
Conveyance Allowance is for travel expenses between home and work. The maximum tax-free amount was 19,600 INR per year. However, this benefit was withdrawn by the government under the new tax regime effective April 1, 2018.
Medical Allowance is a reimbursement for medical expenses incurred by employees, tax deductible up to 15,000 INR a year. However, this benefit was withdrawn by the government under the new tax regime effective April 1, 2018.
Meal Allowance is tax free with vouchers with a median value of 22,000 INR.
Special Allowance is the balancing component and is the amount left over after basic and the fixed allowances above are deducted from fixed compensation. Employees are taxed on this component of pay.
In addition to the standard items included in fixed compensation, there are other pay elements included in the CTC measurement, including a car or car allowance and retirals, which are company contributions to the Employee Provident Fund (for retirement) and the employer accrual towards the gratuity obligation.
Structuring rewards packages in India may seem particularly daunting for compensation professionals new to the market. However, taking a broad view of how pay is structured can break down these complexities. In order to design competitive and fair rewards packages, HR and compensation professionals must first understand each component and what they are intended to provide to the employee.
Furthermore, new tax laws that went into effect on April 1, 2018, make it even more important to stay up-to-date on what each component of compensation costs employees and employers in taxes.
The full version of this article first appeared on Radford's website.
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