Salary structure explained: basic, HRA, allowances and a worked ₹6 lakh CTC

A salary structure splits an employee's cost to company (CTC) into basic, house rent allowance, other allowances and the employer's statutory contributions. Basic is usually 40 to 50% of CTC, HRA is 40 to 50% of basic, employer PF and gratuity sit inside CTC but never reach the bank, and the employee's own PF, professional tax and TDS are deducted from gross to give take-home. This guide builds a full ₹6,00,000 CTC structure.

CTC, gross and take-home: three different numbers

Employees hear one number in the interview and see a different one in the bank, and the gap causes more disputes in small companies than late salaries do. There are three layers.

CTC (cost to company) is everything the employer spends on the employee in a year: salary, allowances, employer's PF and ESI contributions, gratuity provision, statutory bonus, and sometimes insurance premiums or a joining bonus. It is a budgeting number, not a pay number.

Gross salary is what the employee earns each month before deductions: basic, HRA, special allowance, LTA and any other allowances. It is CTC minus the employer's contributions.

Take-home (net) salary is gross minus the employee's own PF contribution, professional tax, ESI (if applicable) and TDS. This is the bank credit.

A rough rule for a ₹6 lakh CTC with no ESI: gross is about 93% of CTC and take-home about 88%. Write all three on the offer letter and the first argument never happens. The hiring your first employee checklist covers what else the letter should say.

The components, one by one

Basic salary

Basic is the foundation because everything else is computed on it: PF at 12% of basic (plus DA), gratuity at 15 days of basic per year, HRA exemption limits, and often bonus and leave encashment. Small employers usually fix basic at 40 to 50% of CTC (or of gross). Two constraints bound the choice.

At the low end, basic plus DA must not fall below the state minimum wage for the category of work, and the Code on Wages, 2019 (brought into force in November 2025 along with the other labour codes; check the latest notification and rules) defines "wages" so that excluded components such as HRA, overtime and bonus cannot exceed 50% of total remuneration; anything above that is added back to wages for PF, gratuity and bonus purposes. In practice that pushes basic plus DA toward half of gross.

At the high end, a large basic raises both the employee's and the employer's PF and the gratuity provision. Employers who once shrank basic to ₹6,000 to minimise PF are now on the wrong side of the Supreme Court's 2019 ruling in the Vivekananda Vidyamandir case, which held that allowances paid universally to all employees are part of PF wages.

House rent allowance (HRA)

HRA is typically 40 to 50% of basic. Its tax value comes from Section 10(13A) read with Rule 2A: under the old regime the exempt portion is the least of (a) actual HRA received, (b) rent paid minus 10% of salary (basic plus DA), and (c) 50% of salary in Delhi, Mumbai, Kolkata and Chennai or 40% elsewhere. Note that for this rule Bengaluru, Hyderabad, Pune and every other city are "non-metro" at 40%.

The employee must actually pay rent and give rent receipts; if annual rent exceeds ₹1,00,000, the landlord's PAN is needed for the employer to allow the exemption at the TDS stage. Rent paid to parents is allowed if it is genuinely paid and they report it. HRA exemption is not available under the new regime.

Special allowance

Special allowance is the balancing figure: whatever remains of gross after basic, HRA and any fixed allowances. It is fully taxable and, since the 2019 Supreme Court ruling, is generally counted as PF wages if it is paid to everyone as a matter of course. Do not confuse it with allowances that have specific exemptions.

Leave travel allowance (LTA)

LTA is exempt under Section 10(5) for the cost of domestic travel fare (not hotels or food) for the employee and family, for two journeys in a block of four calendar years (the current block is 2026 to 2029), against actual tickets. Small employers usually fix it at ₹15,000 to ₹25,000 a year. Under the new regime it is simply taxable salary.

Reimbursements

Fuel and vehicle maintenance, mobile and internet, books and periodicals, and uniform allowances are exempt under the old regime to the extent of actual bills for business use, under Section 10(14) and the perquisite rules in Section 17(2). They require bills every month and add administrative load, which is why many small firms now skip them: under the new regime they carry no tax advantage and the employee is usually better off with a higher standard deduction anyway.

Employer's contributions inside CTC

• Employer PF: 12% of basic plus DA (8.33% to the pension scheme, capped on ₹15,000 wages, and the rest to the provident fund), plus about 1% for EDLI and administrative charges. Details in the EPF guide for employers.
• Employer ESI: 3.25% of gross wages, only if gross is ₹21,000 or less and the establishment is covered (10 or more employees in most states). See the ESI guide.
• Gratuity provision: 15 days of last-drawn basic for each completed year, payable after five years of service under the Payment of Gratuity Act (establishments with 10 or more employees). Employers provision it at 15/26 ÷ 12 of basic, which is 4.81% of basic per month.
• Statutory bonus: for establishments with 20 or more employees, employees with wages up to ₹21,000 are entitled to a minimum 8.33% bonus (on a ceiling of ₹7,000 or the minimum wage, whichever is higher) under the Payment of Bonus Act.

Worked structure: ₹6,00,000 CTC in Bengaluru

Suppose Kavya joins a 12-person software services firm in Bengaluru as an account manager on a ₹6,00,000 CTC. The firm is covered under PF (it has more than 20 employees counting contractors), not under ESI for her (gross above ₹21,000), and Karnataka professional tax applies. Here is a clean structure.

So the ₹50,000 a month that Kavya heard becomes ₹46,638 of gross and ₹44,038 in the bank. The ₹5,962 gap is her PF (both shares, which are her money later), the gratuity she will see only if she stays five years, and professional tax.

Why TDS is nil here

Under the new regime, which applies unless she opts out, her taxable salary is gross ₹5,59,656 minus the ₹75,000 standard deduction, which is ₹4,84,656. Slab tax on that is 5% of the portion above ₹4,00,000, or about ₹4,233, but the Section 87A rebate wipes out tax for total income up to ₹12,00,000. Her employer deducts nothing under Section 192, assuming she has declared no other income. The mechanics of monthly TDS on salary are in the TDS on salary guide.

The HRA calculation, if she chose the old regime

Say Kavya pays ₹12,000 a month rent for a flat in Indiranagar. Under the old regime the exempt HRA is the least of: actual HRA ₹1,20,000; rent paid minus 10% of basic, which is ₹1,44,000 − ₹24,000 = ₹1,20,000; and 40% of basic (Bengaluru is non-metro for this rule) = ₹96,000. The exemption is ₹96,000 and ₹24,000 of HRA is taxable. She would also get ₹28,800 of employee PF under Section 80C and a ₹50,000 standard deduction. At her income the new regime still gives nil tax, so the old regime does not help her; at higher incomes with large rent and Section 80C investments, the comparison must be run each year.

How the new tax regime changes salary design

For FY 2026-27 the new regime is the default. Slabs are nil up to ₹4,00,000, then 5% to ₹8,00,000, 10% to ₹12,00,000, 15% to ₹16,00,000, 20% to ₹20,00,000, 25% to ₹24,00,000 and 30% above, with a ₹75,000 standard deduction and a Section 87A rebate that makes income up to ₹12,00,000 (₹12,75,000 of salary) tax-free. HRA, LTA, most reimbursements, Section 80C and 80D are not available.

Three things survive under the new regime and are still worth building into CTC: the employer's PF contribution (not taxable up to 12% of salary, within the ₹7,50,000 aggregate cap on employer PF, NPS and superannuation), the employer's NPS contribution under Section 80CCD(2) (deductible up to 14% of basic plus DA), and gratuity (exempt up to ₹20,00,000 on receipt for private employees). Everything else is now design for clarity rather than for tax.

The practical effect for a small employer: a structure with a sensible basic, a round HRA, a modest LTA and one special allowance is enough. Ten reimbursement heads with monthly bills are effort that only pays off for employees on the old regime with incomes above the rebate limit. Ask each employee once a year which regime they choose (the employer needs the declaration to compute TDS), and keep the structure the same for both.

Common mistakes in small company salary structures

Basic set absurdly low. A ₹5,000 basic on a ₹40,000 gross to save PF. It falls foul of the 2019 Supreme Court ruling, the wages definition under the Code on Wages and often the minimum wage; PF inspectors reassess with damages and interest.

Deducting the employer's PF share from the employee. CTC can include employer PF; gross cannot be reduced by it. Both 12% shares must show separately on the salary slip.

Forgetting ESI when gross dips below ₹21,000. Loss-of-pay months or part-month joining can pull an employee into ESI wages for that contribution period; check each period rather than assuming.

Ignoring professional tax. It is state-specific (Karnataka ₹200 a month above ₹25,000 gross, Maharashtra ₹200 a month with ₹300 in February above ₹10,000, nil in Delhi, Haryana, UP and Rajasthan) and must be deducted and paid by the employer. See the state-wise professional tax guide.

HRA allowed without rent receipts or landlord PAN. If TDS was reduced for an HRA exemption that the employee cannot prove, the employer answers for the short deduction.

Gratuity shown in CTC but never provisioned. After five years the payout (15/26 × last basic × years) arrives as a lump sum. Provision it monthly, or at least keep a reserve.

Rounding the structure after the offer. Agree basic, HRA and allowances before the offer letter goes out; changing the split later to reduce PF is a dispute waiting to happen.

How VyaparKit helps

VyaparKit is a toolkit rather than an HR system, but it handles the documents that a clean structure needs. The offer letter generator lets you set out CTC, gross and take-home with the breakup on one page, the salary slip tool prints monthly slips with basic, HRA, allowances, PF, ESI and professional tax shown separately, and the payroll run computes the deductions for the whole team and produces a NEFT bank file so salary day is one upload. It will not file your PF or ESI returns; it gets the numbers right so those filings are quick.

Next steps

• Write down CTC, gross and take-home for every employee and check they reconcile.
• Fix basic plus DA at 40 to 50% of gross and confirm it clears your state minimum wage.
• Collect each employee's regime choice and rent details once a year, before the first payroll of April.
• Provision gratuity monthly at 4.81% of basic for anyone likely to cross five years.
• Read the EPF guide for employers to confirm which allowances count as PF wages in your structure.