Designing a compliant and tax-efficient salary structure in India is essential for any global company planning to hire locally or remotely. India’s payroll system includes multiple components CTC, gross salary, in-hand salary, allowances, statutory contributions, and tax deductions that work differently compared to markets like the U.S., UK, or EU. For many employers, the complexity lies not in the cost itself, but in how the components must be structured to meet legal requirements such as PF, ESIC, TDS, and the upcoming wage code norms. This guide breaks down the Indian salary structure in a way global HR teams and founders can easily understand, with clear examples, best practices, and compliance insights. Whether you are hiring directly or through an Employer of Record (EOR), this framework helps you create fair, transparent, and fully compliant Indian compensation packages.

What Is Salary Structure in India? Understanding CTC, Gross Salary & In-Hand Pay

Salary structure in India is more than just what a worker earns it reflects how the total compensation is broken down across fixed pay, allowances, deductions, taxes, and statutory contributions. Unlike many Western countries, where the offer letter presents a simple gross annual salary, Indian compensation is typically shown as CTC (Cost to Company). This leads to confusion for global employers because CTC includes both direct and indirect benefits such as employer PF contribution and gratuity. Understanding the distinction between CTC, gross salary, and in-hand (net) salary is crucial for compliant payroll processing and for setting accurate expectations with employees.

Below, each concept is broken down clearly from a global payroll perspective.

Suggested Read: Remote Employees Onboarding Checklist with EOR in India

What Is CTC (Cost to Company)?

CTC is the total annual cost a company incurs for employing someone. It includes all fixed salary components, allowances, bonuses, employer contributions to Provident Fund, gratuity, and any additional benefits. In India, employers often include indirect expenses like insurance premiums or meal cards inside CTC. This means CTC is not the salary an employee receives, which often surprises global employers used to offering “base + bonus” models.
Key aspects:

• Includes employer PF, gratuity, insurance, benefits
• Higher CTC does not always mean higher take-home pay

What Is Gross Salary?

Gross salary refers to the employee’s earnings before tax and statutory deductions, but excluding employer contributions. It includes basic salary, HRA, special allowance, and other monthly components. Gross salary is what appears on the payslip prior to deductions like PF employee share, TDS, and professional tax.
Important notes:

• Gross ≠ CTC
• Gross salary determines tax liability
  

What Is In-Hand Salary (Net Pay)?

In-hand salary is the take-home pay employees receive after all deductions. These deductions include employee PF contribution (12%), TDS (income tax), ESIC (if applicable), and professional tax (in certain states). Global employers must understand that Indian employees often evaluate a job offer based on this number rather than CTC.
In-hand salary formula:
Net Salary = Gross Salary – (PF + ESIC + PT + TDS + Other Deductions)

Key Components of Salary Structure in India

The salary structure in India is built around a combination of fixed pay, variable pay, tax-efficient allowances, and statutory contributions. Each element serves a different purpose basic salary anchors benefits and compliance, allowances improve take-home compensation, and employer contributions help meet legal obligations under PF, ESIC, and gratuity. For global employers new to the Indian market, understanding how these components interact is crucial for designing attractive and compliant compensation packages. This also impacts cost forecasting, since CTC includes elements not directly paid to employees. In 2025, companies are increasingly optimizing salary structures to balance tax efficiency, employee satisfaction, and statutory adherence, especially with wage code implications on the horizon. Below, we break down every key salary component and its role in the Indian payroll ecosystem.

Basic Salary

Basic salary is the foundational component of Indian payroll and typically represents 40–60% of the total CTC, depending on company policy and industry norms. It is a fully taxable component and influences other statutory calculations such as PF (Provident Fund), ESIC, and gratuity. Employers must be cautious: allocating too low a basic salary may seem beneficial for reducing PF liability, but it exposes companies to compliance risks especially as wage code readiness requires basic salary to form at least 50% of total compensation. For global teams, treating basic salary as the fixed, predictable part of employee compensation ensures clarity and compliance.

Allowances (HRA, LTA, Conveyance, Special Allowance)

Indian salary structures include various allowances that boost take-home pay while offering tax efficiency when structured correctly. The most common include:

• HRA (House Rent Allowance): Tax exemption available if employee lives in rented accommodation.
• LTA (Leave Travel Allowance): Exemption allowed for travel within India, subject to proof.
• Conveyance allowance: Usually included within special allowance unless specifically defined.
• Special Allowance: A balancing figure to complete CTC after defining other components; fully taxable.

Allowances help create a flexible and employee-friendly compensation structure. They also enable global employers to provide tax-saving benefits similar to Western flexible benefit plans.

Variable Pay & Performance Bonuses

Variable pay is performance-linked compensation that motivates employees and aligns salary growth with business outcomes. In India, variable pay can range from 5–20% of CTC, and is typically disbursed quarterly or annually. For global employers, setting clear KPIs and transparent payout rules ensures fairness and avoids disputes. Variable pay is fully taxable and not counted toward PF or gratuity unless added to basic wages. Employers hiring remote Indian employees should clarify whether variable pay is guaranteed (retention bonus) or performance-based. Clear documentation in the offer letter avoids misinterpretation.

Employer Contributions (PF, ESIC, Gratuity)

Employer contributions form an essential part of CTC in India and are legally mandated under various labor laws. These include:

• Provident Fund (PF): Employer contributes 12% of basic salary (subject to wage ceiling).
• ESIC: Applicable if employee gross salary ≤ ₹21,000/month; employer contributes 3.25%.
• Gratuity: Employer must account for 4.81% of basic wages annually.

These contributions do not increase take-home salary but are crucial for compliance and long-term financial security. Global employers must factor these into cost planning, especially when hiring through an EOR that automatically manages contributions.

Mandatory Deductions in India (PF, ESIC, PT, TDS)

Understanding mandatory deductions is essential for designing a compliant salary structure in India. These deductions directly affect an employee’s take-home pay and influence how employers calculate the true cost of compensation. For global companies hiring in India, it’s important to recognize that deductions are governed by statutory laws rather than employer preference. The four primary deductions Provident Fund, ESIC, Professional Tax, and TDS serve different purposes: retirement savings, social security, state revenue, and income tax collection. Miscalculating any of these can result in payroll errors, compliance penalties, and employee dissatisfaction. Below, we explain each deduction clearly to help employers design accurate and compliant payslips.

Employee Provident Fund (EPF)

EPF is India’s retirement savings program and applies to most salaried employees. Both employer and employee contribute 12% of basic wages toward PF each month, though some companies opt for contributions limited to a statutory wage ceiling. For employees, PF deductions reduce their in-hand salary, but the accumulated amount grows with government-set interest and becomes a major long-term benefit. From an employer’s perspective, PF compliance is non-negotiable and requires timely monthly contributions and filings. When structuring salaries, global employers must factor in how the basic salary impacts PF liability, particularly for higher-paid employees.

ESIC Contributions

Employees’ State Insurance (ESI) provides medical, disability, and maternity benefits, and applies when an employee’s gross monthly salary does not exceed ₹21,000. ESIC contributions are made by both parties: 3.25% from the employer and 0.75% from the employee. For junior employees or entry-level roles, ESIC significantly enhances social security coverage. For employers, especially foreign companies, it is crucial to understand that ESIC is mandatory when eligibility criteria are met there are no exemptions based on organizational size or type. This deduction must be clearly shown in payslips and calculated accurately every payroll cycle.

Professional Tax

Professional Tax (PT) is a state-imposed tax applicable in certain Indian states such as Maharashtra, Karnataka, and West Bengal. The deduction amount varies by state and usually ranges from ₹150 to ₹250 per month, depending on salary slabs. PT is collected directly from employees through payroll and remitted to the respective state government. Global employers often overlook PT when setting up salary structures, particularly if they are unfamiliar with India’s state-specific taxation system. Including PT in monthly payroll calculations ensures that payslips remain compliant and employees do not face issues when filing income tax returns.

TDS (Income Tax Deduction at Source)

TDS is the monthly income tax withheld by employers on behalf of employees. The deduction amount depends on factors such as annual projected income, investment declarations, and the employee’s chosen tax regime (old or new). Global employers must note that TDS is not a fixed percentage; it must be recalculated annually and sometimes adjusted monthly if employees update their tax-saving declarations. Accurate TDS deduction helps employees avoid large year-end tax liabilities and ensures employers remain compliant with Indian tax laws. Incorrect TDS handling is one of the most common payroll compliance issues multinational companies face when hiring in India.

Recommended Salary Structures for Global Companies Hiring in India

Designing a salary structure in India requires balancing compliance, employee expectations, cost efficiency, and clarity. Global employers often struggle with aligning compensation to Indian norms, especially because CTC includes statutory components that do not directly reach the employee as take-home pay. A well-designed structure ensures predictable payroll processing, transparent communication, and legal compliance while maximizing employee satisfaction. In India, employees are highly sensitive to in-hand salary, so structuring allowances, basic salary, reimbursements, and deductions correctly becomes essential. Below are practical, easy-to-implement example structures tailored for global teams hiring mid-level and junior employees, along with a tax-efficient model and guidance for remote employees.

Standard CTC Salary Split Example (₹12 LPA)

This example represents a typical mid-level professional in technology, finance, marketing, or operations. The structure demonstrates how CTC, gross salary, and in-hand salary differ once statutory deductions are applied.

Sample Salary Structure ₹12,00,000 Annual CTC

Estimated Deductions (Monthly)

• Employee PF: 5,400
• Professional Tax: 200 (state-dependent)
• TDS: approx. 5,000–10,000 (varies by tax regime)

Approximate In-Hand Salary

₹75,000–80,000 per month after deductions.

This structure offers a balanced distribution between basic salary and allowances while keeping statutory contributions compliant.

Standard CTC Salary Split Example (₹6 LPA)

This structure is typical for junior-level or entry-level roles in Indian companies and multinational teams.

Sample Salary Structure ₹6,00,000 Annual CTC

Estimated Deductions (Monthly)

• Employee PF: 2,400
• ESIC: applicable depending on gross salary
• Professional Tax: 200
• TDS: generally low at this income level

Approximate In-Hand Salary

₹38,000–40,000 per month after deductions.

This structure maintains statutory compliance while maximizing take-home salary for junior employees.

Tax-Optimized Salary Structure Template

A tax-efficient salary structure increases in-hand pay without increasing employer cost. Companies often optimize by adjusting HRA, LTA, and reimbursements while keeping basic salary within compliance limits.

A sample tax-optimized approach includes:

• A higher HRA component for employees living in rented accommodation
• Optional components such as phone/internet reimbursement
• Meal card or food allowance
• Reduced fully taxable special allowance
• Maintaining basic salary at 45–50% of total compensation

This structure is especially valuable for roles with higher tax burdens under the old tax regime. Employees choosing the new tax regime may prefer simpler, allowance-light structures. Employers should offer flexibility by allowing employees to select components based on their financial preferences.

Salary Structure for Remote Employees in India

Remote hiring requires additional considerations because employees may be located across various states with different tax and labor regulations. For remote roles, companies typically adopt a simple, consistent structure that fits all locations while ensuring compliance with statutory contributions and professional tax requirements. A remote-friendly structure usually focuses on a predictable basic salary, a stable HRA amount, and a clear special allowance figure. Employers should also consider reimbursements for internet, equipment, or co-working spaces to support productivity.

Because compliance varies by state and documentation is required for allowances, many global employers choose to hire remote workers in India through an Employer of Record. This eliminates administrative complexity while ensuring that salary structures and statutory deductions remain fully compliant regardless of where the employee lives.

Compliance Rules That Impact Salary Structure in India

Salary structuring in India is not purely a financial decision it is equally a compliance function. Employers must design compensation in a way that adheres to national labor regulations, statutory benefit requirements, state-level wage rules, and sector-specific mandates. Non-compliance can lead to penalties, employee claims, payroll disputes, and legal liability. Global employers often underestimate these complexities, especially since Indian payroll rules are far more detailed compared to many Western systems. Beyond statutory contributions such as PF and ESIC, companies must ensure adherence to gratuity eligibility, minimum wage requirements, overtime calculations, and emerging wage code norms that may alter how salaries must be split between basic pay and allowances. Understanding these compliance factors ensures that salary packages remain legally sound and prevent unnecessary complications during audits or inspections.

Gratuity Eligibility & Calculation Rules

Gratuity is a statutory benefit paid to employees who complete at least five years of continuous service. It acts as a financial reward for long-term employment and is calculated based on a formula linked to basic salary. The standard calculation is:
Gratuity = (15/26) × Last Drawn Basic Salary × Years of Service

Employers must provision gratuity annually as part of CTC, even though payment occurs only upon separation. This ensures transparency and predictable cost planning. Companies hiring through direct employment or through an Employer of Record must incorporate gratuity calculations from day one, especially since misclassification or non-provisioning can lead to disputes. For global employers, understanding gratuity helps avoid confusion when comparing Indian CTC packages to international total compensation models.

PF Wage Ceiling & New Wage Code Considerations

Provident Fund rules allow employers to either contribute PF based on actual basic salary or limit contributions to a statutory wage ceiling. However, organizations offering higher salaries must ensure that their approach is consistently applied across employees to avoid compliance risks. The upcoming wage codes emphasize that the basic salary component should constitute at least half of total compensation. This change aims to standardize salary structures and reduce practices where variable allowances are inflated to reduce PF liability. Though not fully implemented nationwide, the wage codes have pushed many employers to redesign their salary structures proactively. Global employers should take note because salary restructuring may become mandatory if the new rules are enforced across states.

Minimum Wages & Overtime Regulations

Minimum wage rules in India vary significantly by state, job role, skill level, and industry category. Employers must ensure that the basic wage component meets local minimum requirements rather than relying on total CTC as the benchmark. Overtime must be paid at twice the normal hourly rate, and employers must maintain proper work-hour and attendance records. For remote workers, overtime compliance still applies if employees follow scheduled work hours. Global companies unfamiliar with India’s wage framework may unknowingly violate state wage norms, leading to penalties or employee claims. Ensuring that salary structure meets local minimum wage rules is essential for both employer branding and legal compliance.

Salary Structure vs Payroll Processing in India

While salary structure defines how compensation is broken down into components, payroll processing is the monthly operational cycle that ensures employees are paid accurately, on time, and in compliance with statutory requirements. Many global employers assume salary structuring and payroll processing are interchangeable concepts, but in India, they play distinct roles. A salary structure sets the framework basic pay, allowances, employer contributions, and deductions while payroll processing applies this structure each month by calculating worked days, absences, taxes, and compliance deductions. For international companies hiring Indian talent, understanding the distinction is essential to prevent payroll discrepancies, incorrect tax calculations, and compliance errors. A well-designed salary structure makes payroll processing smoother, predictable, and easier to automate. Below are the key elements involved in the Indian payroll cycle and what employers must consider when generating payslips.

Monthly Payroll Cycle in India

India’s payroll cycle typically runs on a monthly schedule, with salaries disbursed between the 25th and the last day of the month. Employers calculate salary based on attendance, approved leaves, and overtime for the period. Deductions such as PF, ESIC, TDS, and Professional Tax are applied at this stage. Global teams must also account for prorated salaries when employees join or exit mid-month. Payroll teams must generate statutory reports, file contributions, and remit payments to government portals within strict deadlines. Missing these timelines can result in penalties, making consistency and precision essential. Automating payroll or using an EOR service can help ensure compliance with these recurring requirements.

Payslip Compliance Requirements

Indian labor laws require employers to issue payslips every month, and these must include essential details to remain compliant. A standard payslip must display:

• Employee details (name, designation, employee ID)
• Pay period
• Salary components (basic, allowances, reimbursements)
• Statutory deductions (PF, ESIC, PT, TDS)
• Employer contributions
• Net salary payable
• Bank transfer details and payment date

Payslips serve as legal proof of employment, income, and statutory compliance. Employees rely on them for loan applications, tax filings, and visa processing. Employers must ensure accuracy and consistency to avoid disputes. Digital payslips are widely accepted, but they must still adhere to legal formatting and transparency standards. For global companies, ensuring payslip compliance is often simplest when handled by a local payroll provider or an Employer of Record.

How an Employer of Record (EOR) Simplifies Salary Structuring in India

Hiring employees in India without a local entity can be complex, particularly when it comes to creating compliant salary structures, managing deductions, and handling payroll filings. An Employer of Record (EOR) bridges this gap by becoming the legal employer on behalf of global companies. The EOR manages every aspect of compensation—salary structuring, statutory contributions, payroll processing, benefits administration, and compliance with state and national labor laws.

For global employers, the biggest advantages of using an EOR are accuracy, speed, and risk reduction. Instead of learning India’s multi-layered payroll and taxation system, companies can rely on a well-established EOR to ensure that every employee receives the correct salary breakdown and that all statutory obligations are met. This is particularly valuable for distributed teams, where employees may be located in different Indian states with varying rules on minimum wages, professional tax, and local labour requirements.

Why Asanify Is the Preferred EOR Partner for Global Companies Hiring in India

Asanify specializes in helping international companies hire and manage remote teams across India without the need to set up a local subsidiary. Asanify handles end-to-end payroll, including salary structuring, payslip generation, statutory deposits, and tax compliance. The platform ensures that every employee’s salary is structured according to Indian norms while aligning with the employer’s budget and compensation philosophy.

By partnering with Asanify, employers eliminate the risk of misclassification, incorrect PF or TDS deductions, or non-compliance with state regulations. Asanify also provides localized onboarding, employee support, and seamless payments in multiple currencies, making it easier for global companies to build high-performing Indian teams quickly and compliantly.

Suggested Read: Creating and Sending Job Offer Letters for Remote EOR Employees in India

Conclusion

India’s salary structure is detailed, multi-layered, and highly regulated, making it essential for global companies to understand how each component impacts both employer cost and employee take-home pay. A well-designed structure balances statutory obligations, tax efficiency, transparency, and flexibility. By mastering concepts such as CTC, gross salary, in-hand pay, allowances, statutory deductions, and compliance rules, employers can avoid common mistakes and build fair, competitive compensation packages.

For organizations expanding into India, partnering with an Employer of Record like Asanify simplifies the entire process—from salary structuring and payroll compliance to benefits administration and onboarding. This enables global teams to focus on growth while ensuring a seamless, compliant experience for their Indian employees.

FAQs

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.