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COMPENSATION RULES AND DESIGN GUIDELINES

Monthly Guidelines Amounts (per

Components month)

Basic As per Bombay Chamber of Commerce Rs.3500/- (minimum)

guidelines Minimum Basic figure for skilled, maximum no limit..
semi skilled and un skilled employees
should be minimum of Rs.2650, 2950 and
3250/-. However to be on safer side, do not
keep Basic figure less than Rs.3500/- p.m.

Income Tax Benefit: NIL

House Rent Maximum 50% basic (Metro cities) 40% Maximum allowed 50%
Allowance (HRA) basic (non metro cities). Basic (Metro Cities) OR
40% Basic (Non Metro
Income Tax Benefit: Cities)
Excess of Actual rent paid over 10% of
Basic salary OR Maximum HRA allowed
(50% or 60% of basic) OR Actual Rent Paid
– whichever is lower is Exempt from
Tax.

For example.
Basic Rs.20000/-
HRA Rs.10000/-
Actual Rent Rs.8000/-
Excess of actual rent paid over 10% of
Basic (10%x2000 – 8000) Rs.6000
Hence max exemption allowed is lowest i.e.
Rs.6000/- subject to Rent Receipts of
Rs.6000/- only
Transport Supposed to be conveyance allowance Rs.800/- (max)
Allowance meant for transportation between office and
residence only.

Income Tax Benefit:

Exempt maximum up to Rs.800/- per
month. No proof required.
Children’s Income Tax Benefit: Rs.200/- (max)
education Rs.100 per child subject to max 2 children.
allowance Hence maximum Rs.200/- is exempt
Special Allowance Balancing figure – after choosing all the Balancing Figure
above components with respect to their
maximum limits absorbed, remaining
amount can be named as Special
Allowance. It is fully taxable.
Medical Can be given against bills or without bills Rs.1250/- (max)
Reimbursements does not matter. Some companies give it
monthly, some quarterly, half yearly or
yearly also. Some companies give it only

Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)

ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)
 2

against medical bills, some do not ask for

bills, rather bills are only demanded for
Final Tax Computation at the end of the
year. No thumb rule about it. Preferred to
pay monthly, without bills and ask bills as
per your wish, quarterly, half yearly or at
the end of the year. Do not choose to give
it against bills only, there is no rule for the
same…It only makes salary processing a
cumbersome process.
Income Tax Benefit:
Maximum Rs.1250/- p.m. (Rs.15000 p.a.)
is exempt only if Original Bills are provided.
Food Coupons Non cash component, exempt up to Rs.1000/- (max)
Rs.1000/- p.m.

RETIRALS GUIDELINES Amount (per

month)
Provident Fund Employer’s contribution (this is given to 12% of Basic
RPFC directly. However employee’s
contribution is deducted from his Monthly
salary above and sent to RPFC. Hence total
deduction works out to be 12+12 = 24% of
Basic.

Income Tax Benefit:

Employee’s contribution of 12% is eligible
for Deduction from Taxable income. It can
be treated as exempt investment.
Gratuity It is an annual component but since it is 15 days monthly
retrial benefit, it is included here. basic per year.

ANNUAL GUIDELINES AMOUNT (per

COMPONENTS year)
Leave Travel Journey within India primarily by Rail – 2nd No Limit as such…
Allowance / A/c class for employee and his immediate
Concession family (spouse, children, parents, siblings).
Where rail transport is not available,
equivalent Public Transport like Bus is also
allowed equivalent to maximum 2nd AC Rail
fair only.

Air transport Y class is allowed only to

Central Government employees.

Can be paid any time in the year in part or

in full whenever the employee claims it.
However employee must have proof of
leaves taken for travel purpose and should
be away from office for at least 2 days in a
year.

Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)

ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)
 3

Income Tax Benefit:

Exemption will be on Actual expenses only.
Exemption is allowed only for two such
journeys in the block of 4 years starting
from 1986 – 89 onwards.
Gift Vouchers Same on the lines of food coupons, these Between
coupon companies like Sodexho Pass also Rs.3000/- to
provide attractive Gift Vouchers, which can Rs.5000/-
be given on Diwali Festival Occasion. For
junior employees amount can be lower, for
senior categories, amount can be higher up
to Rs.5000 or so.

Income Tax Benefit:

Please check with Tax consultants how
much is exempt from taxable income. As
per my knowledge, it is not more than
Rs.5000/-

For Senior Management Employees only

PERQUISITES GUIDELINES AMOUNT (Per
Year)
Rent Free Income Tax effect:
Accommodation Taxable perquisite – Value of rent free
accommodation considered taxable for the
Owned or period of house occupied is either of the
Managed by the following:
Employer - For Private Sector Employees
(Includes Flat, 10% of Salary (for metro cities) or (7.5%
Hotel, Farmhouse, for non metro cities) + Excess of Fair Rent
Guest House, Value (market rent) over 60% of salary
Caravan, etc.) (i.e. Market Rent – 60% of salary) = Total
taxable value of rent-free acco.
For PSU and Semi-Govt. employees
10% of Salary (for metro cities) or (7.5%
for non metro cities) OR Fair Rent Value
whichever is lower is Taxable.
The term ‘Salary’ will include total of the
following:
Basic, All Allowances & Reimbursements
(excluding Med. Reimb.), Bonus received,
any commission, fees etc.
Fair Rent – Market Rent or Municipal
Valuation of Rent, whichever is Higher.
Car Income Tax effect:
(For personal) Taxable Value will include the following –
Owned by the Actual Running & Maintenance expenditure
Employer incurred by the employer + Driver’s Salary
+ Depreciation – any amount charged by
employer to employee for personal use of
the car.

Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)

ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)
 4

Employee Stock Employee exercises his option by buying

Option Plan out the shares during the exercise period
however tax liability occurs only when an
employee sells the shares on the value of
sale made under the Capital Gains head of
income.

OTHER BENEFITS OUT OF CTC STRUCTURE BUT STILL FORM PART OF

COMPENSATION

Insurance Schemes – employees can be covered under following two schemes. The
policy covers may be kept between the range of Rs.100000 to Rs.500000/-
depending upon the hierarchies or grade system in your company.

• Personal Accident Insurance Scheme (for employee only)

• Medical Insurance Scheme (For employee & dependents which can be spouse,
first two children, parents or in-laws (either of them) etc. Some companies do
not cover parents/in laws, some insurance companies do. Please check this with
them before taking a cover for your employees.
• Maternity Benefits – Some companies have their own maternity benefit schemes
for their female employees and some companies don’t have, rather the depend
on Maternity Benefit Act provisions. However it is not necessary, you can choose
either of the one approach. Having companies own scheme helps a lot because
under the Act govt. procedures to claim benefits are always tedious one.

VARIABLE PAY / PERFORMANCE PAY / Incentives etc

This is not a salary. The objective of this is purely different than salary i.e. you
perform; we pay you accordingly. Whereas objective of Salary is to ‘Regularly’
compensate an employee with a ‘Regular’ figure against the services extended by
him towards the organization. Hence there is no Performance consideration in Salary
or CTC, so there is no logic to include this in CTC structure. VP is purely performance
driven and is not regular or fixed amount. Hence it should always be kept out of
main Salary Structure. Although most of the companies prefer to include this figure
in CTC however it gives vague and unrealistic impression of Salary. Because
individual’s expectations from Salary as terminology differs than Incentives/
Variables etc

Rather an independent and attractive Variable Pay or Incentive Structure can be

designed and should be a part of Rewards & Awards Strategy of the organization.

Following parameters can be kept in mind.

It can be Random figures with broad ranges depending on the Position, Grade,
Designation of the employees. For example if a company has Grades A, B, C, D, E, F
then we can design incentive ranges like for Grade A, Incentives can be within the
range of 0 to 100000, where Rs.0 is for poor and negative performance and 100000
is for Outstanding performers. Similarly employees falling in between can be given
%ages of this range. For example after Poor ratings, you can have Average or Good
or Excellent Rated employees. For them guidelines could be; this year average
employees would get 30%-50% (i.e. Rs.30000/- to 50000/-) Good employees can be

Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)

ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)
 5

given between 50% to 70% (i.e. Rs.50000/- to Rs.70000/- and Excellent Rated
employees can be given between 70-90% (i.e. Rs.70000 to Rs.90000/-) etc.

Another approach can be percentage of CTC can be given as Incentives. It can be

10%, 20% or 30% of Monthly Salary or Basic + Allowances as the case may be. For
example if you decide to keep 30% of Basic + Allowances as Variable Pay or
Performance Incentives, you can further define eligibility on the basis of performance
ratings as follows. If someone’s CTC is Rs.500000/- and his Basic + Allowances
comes to 375000 then his eligibility for incentives comes out to be
30%x375000=112500 i.e. the 100 % incentives for Outstanding performance.
However if he performs at ‘Good’ Rating, he may be given say anywhere between
50-70% of 112500 as incentives.

Note:
You can also choose how you would disburse the amounts of incentives.
In my opinion best will be to include incentive amount in the monthly salary of
employee for next financial year…. Or some companies disburse it quarterly, half
yearly or yearly on a lump sum basis. The decision can be based on your intentions
whether you would like to give a lump sum big amount in the hands of an employee
so that he can realize his big personal aspirations at one go, or you can choose to
include this in monthly salary so that employees’ monthly income inflates regularly.

A Total Compensation Structure may look like this.

MONTHLY ANNUALLY
SALARY COMPONENT Amount (Rs.) Amount
(Rs.)
Basic Rs.3500 (min)
HRA 50% Basic (Metro cities) 40% Basic
(Non Metro)
Transport Allowance Rs.800 (max)
Children’s Education Rs.200 (max)
Allowance
Special Allowance Balancing Figure
Medical Reimbursements Rs.1250 (max)
Food Coupons Rs.1000 (max)
TOTAL MONTHLY
SALARY
Net Take Home Total Monthly Salary – PF – Profession
Tax

Retiral Components
Provident Fund (Co. 12% Basic
Contr.)
Gratuity (15 days basic) 15 days Basic

Annual Components
Leave Travel Allowance No Limit
Gift Vouchers Rs.5000 (max)

Perquisites - Only for

Senior Management
Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)
ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)
 6

Car As given in guidelines

Rent free Accommodation As given in guidelines
ESOP As per company’s scheme
Any other Perks

ANNUAL C.T.C.

OTHER BENEFITS
Personal Accident Insurance Scheme – Rs.200000/-
Medical Insurance Scheme – Rs.200000/-

PERFORMANCE LINKED INCENTIVE PLAN

The Performance Linked Incentive Plan will be based on employee’s Performance
Ratings during our Annual Performance Appraisal Plan in the month of March / April
each year. Each employee would be eligible for a performance based incentive plan
based on following guidelines.
(Incorporate any one of the following)
Maximum Potential Incentives under PLIP will be 30% of Total Monthly Salary. OR up
to Rs.75000/- p.a.

Prepared by: Mukesh Mane – Regional Manager HR (Western Zone)

ALCATEL South Asia Ltd. Mumbai.
Collected by: Mahendra – Sr.HR Executive(ECS-India)