1. To Reduce Employee Tax Burden
The basic salary is fully taxable as per your income tax slab. Many components of a salary—like House Rent Allowance (HRA), conveyance, or special allowance—have tax exemptions or deductions.
By reducing the basic salary and increasing other allowances:
- Employees get a higher in-hand amount after tax.
- The company can optimize the salary structure to legally minimize tax deductions from your paycheck.
Example:
- Basic: ₹50,000 → HRA: ₹20,000 → Special Allowance: ₹10,000
- Reducing Basic to ₹40,000 and increasing HRA/Special Allowance may reduce taxable income slightly.
2. To Increase In-Hand Salary Without Increasing Cost-to-Company (CTC)
CTC includes all salary components + employer contributions (like PF, insurance). Companies sometimes:
- Reduce basic salary (which reduces PF contribution by both employee and employer)
- Increase allowances that are fully payable to the employee
This gives employees more in-hand money immediately, without significantly increasing the total CTC.
3. To Reduce Provident Fund (PF) Liability
PF is 12% of basic salary, contributed by both employer and employee. By reducing basic:
- Both employer and employee contribute less to PF
- Company reduces its financial liability
- Employee gets slightly higher in-hand cash, though long-term retirement savings reduce
4. Flexibility in Salary Components
A lower basic allows companies to:
- Allocate more money to performance-based allowances
- Adjust salaries for tax planning, perks, or reimbursements
- Avoid mandatory increments in PF or gratuity calculations, which are tied to basic salary
5. To Meet Legal or industry Benchmarks
Sometimes companies adjust salaries to:
- Stay competitive in take-home pay compared to peers
- Manage bonus, leave encashment, and gratuity calculations tied to basic salary
Key Takeaways
- Higher in-hand = more liquid cash immediately
- Lower basic = lower PF, gratuity, and long-term benefits
- Companies often structure salaries this way for tax optimization and cost control, not to “cheat” employees
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
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