Most Indian salary structures were designed once, by whoever wrote the first offer letter, and then copied. Nobody revisits them, because they appear to work: people get paid, the numbers add up.
The problems surface later, and they are expensive. PF calculated on the wrong base. A gratuity liability nobody provisioned for. Two people doing the same job on structures that cannot be compared. And an employee who cannot understand their own payslip.
What a salary structure actually is
The rules deciding how a total cost to company is split into components, and how those components move when someone is promoted.
In India the split matters more than in most countries, because statutory obligations attach to specific components rather than to the total. The main ones:
- Basic, which drives PF, gratuity and usually notice pay
- HRA, which drives a tax exemption for employees who pay rent
- Allowances and reimbursements, treated differently for tax
- Employer contributions to PF and ESI, which sit inside CTC but never reach the employee’s bank account
That last point causes more friction than any other. A candidate hears a CTC number and calculates take-home from it. The gap between the two is where offers fall apart.
It decides what you actually owe
Set basic too low to reduce PF and you create a liability rather than avoiding one. PF is calculated on basic plus dearness allowance, and the practice of pushing basic down while inflating allowances has been repeatedly challenged. It also suppresses gratuity, which is calculated on the same base and becomes payable at five years, or at one year for fixed-term employees under the Codes.
Set it too high and your PF and gratuity costs rise faster than salaries do. There is a sensible middle, and it should be a deliberate choice rather than an accident of the first offer letter.
It decides whether people trust the numbers
An employee who cannot follow their payslip assumes something is wrong. Usually nothing is, but the assumption costs you goodwill and a conversation every month.
The fix is not a longer payslip. It is a structure with few enough components that it can be explained in a sentence, and an offer letter that shows CTC, gross and expected take-home separately.
It makes pay decisions defensible
Without bands, every salary is a negotiation, and the people who negotiate hardest end up paid most. That is not the same as the people who contribute most, and it becomes visible when someone finds out.
There is a legal edge too. The Code on Wages, 2019 prohibits discrimination in wages on the ground of gender for the same work or work of a similar nature, and it widened that beyond male and female to expressly include transgender employees. A structure with defined bands is how you demonstrate you are complying. An ad-hoc one is how you discover you were not.
It should change as people grow
A structure that never moves quietly becomes a retention problem. If the only way to get a meaningful raise is to resign, people will resign.
Two things worth having. Bands wide enough that someone can progress without a title change, and a written note of what moves someone from the bottom of a band to the top. It does not need to be elaborate. It needs to exist, so the answer to “what would it take” is not “ask again next year”.
If you are fixing an existing structure
Do not change existing employees’ components downward. Reducing basic to correct a historical decision creates a fresh problem, and the employee will notice.
Fix it forward instead: apply the corrected structure to new hires and to increments, and let the old one age out. That is slower and considerably safer.
Also check professional tax while you are in there. It is a state levy with different slabs per state, deducted based on where the employee works rather than where you are registered. It is the most common payroll error we find when taking over from an in-house process.
We review and rebuild salary structures as part of HR setup, including the statutory impact of each component. Send us a sample structure and we will tell you what it is costing you.
Build a Labour-Codes-compliant salary structure in minutes - Basic, HRA, PF, ESIC and take-home, auto-calculated.
Get it free →