When you build a salary structure, it’s not just about numbers. You’re creating a balance — between what your people take home, what they save for the future, and what the law demands. It’s a moral responsibility as much as a financial one. And in India, with PF (Provident Fund), ESI (Employee State Insurance), and evolving labour codes, designing that balance correctly isn’t optional — it’s essential.
If you get it wrong, you risk non-compliance, penalties, and loss of trust. If you get it right, you build a sustainable, fair compensation model that protects your employees and your business.
Putting together a salary package isn’t just about making someone feel paid enough. When done right, you safeguard:
Statutory obligations – PF and ESI contributions are legally mandated for eligible employees.
Employee protections – Labour codes like the Code on Wages ensure workers get fair minimum wages and safeguards.
Recruitment credibility – Candidates look closely at salary structure. If they feel short-changed or misunderstood, you lose trust.
Cost predictability – A compliant structure protects you from sudden audits or recalculations, giving predictability to payroll costs.
Emotionally, this is about trust. Employees need to feel their salary structure is transparent and fair — not just a legal checkbox.
To structure salaries correctly, you must understand the statutory pieces that your payroll team or HR should incorporate.
Provident Fund (PF)
PF contributions are calculated on Basic + Dearness Allowance (DA).
Typically, both employee and employer contribute 12% each.
For high basic salaries, there is a “wage cap” (often around ₹ 15,000) for mandatory PF calculations, unless the employee voluntarily opts for a higher base.
The employer’s 12% is split into: EPF, EPS (pension), and small charges — for instance, EPS is ~ 8.33% of basic + DA.
Employee State Insurance (ESI)
Employees are eligible if their gross monthly wages are up to ₹ 21,000 (or ₹ 25,000 for persons with disabilities).
Employee contributes 0.75% of their wage, while the employer contributes 3.25%, totalling 4%.
Not all wage components are counted for ESI: basic, allowances like conveyance or city compensatory allowance, and overtime may count — but bonuses or HRA may be excluded.
Labour Codes / Minimum Wage Requirements
The Code on Wages, 2019 consolidates several labour laws (Minimum Wages Act, Payment of Wages, etc.).
Employers must ensure they pay at least the minimum wage prescribed by state or central laws, which may vary by job type, skill, and region.
Wage deductions (like PF, loan recovery) are regulated: for example, the code allows for certain deductions but caps them at a percentage of wages.
Putting theory into practice means making deliberate design choices in your salary structure. Here’s how to do it in a way that ensures compliance and respects your employees:
1. Define Clear Salary Components
A typical and compliant salary structure might look like this:
Basic Pay: Essential for PF calculation
Dearness Allowance (DA): If applicable
House Rent Allowance (HRA): If provided
Special / Variable Allowance: For flexibility
Other Allowances: Conveyance, city compensatory, etc.
Overtime or Bonus (if applicable)
Keeping basic pay at a healthy percentage (say 40–50% of gross) helps PF calculations and pension benefits. If basic is too low, PF base drops and the long-term benefits for employees worsen. On the other hand, if it’s too high, your cost of statutory contributions goes up.
2. Optimize for ESI Eligibility
If many of your employees fall under the ESI wage ceiling, you need to structure gross pay so that ESI is calculated correctly but doesn’t hurt take-home more than necessary.
Include only those pay components that count for ESI when calculating “wages.”
Avoid padding gross pay with non-statutory allowances just to boost take-home, because excessive non-wage pay may distort ESI base.
Make sure you’re actually registered for ESI (if eligible) and check whether all sites / employees are covered correctly.
3. Align with Labour Codes and Minimum Wages
Since the Code on Wages demands compliance with minimum wage laws:
Always check state-wise minimum wage notifications before finalising your salary structure.
If you pay a “special allowance,” ensure that the sum of basic + special doesn’t drop below the minimum wage in your jurisdiction.
Avoid policies that undercut legal minimums just because they feel “market standard.” That’s a ticking compliance bomb.
4. Maintain Proper Documentation & Salary Registers
Legally, you’re expected to maintain records. Non-compliance on record-keeping is not a minor oversight — it’s a serious risk.
Keep a wage register: show how gross pay is built, what’s statutory, what’s variable.
Maintain attendance records, overtime, and wage deductions clearly so that PF, ESI, and labour inspectors see transparency.
Use tools (HRIS, payroll software) to connect these records to your statutory filing process — don’t rely on manual spreadsheets if your team is growing.
5. Regularly Audit Salary Structure Against Laws
Laws change. Salary structures should too — to stay compliant and fair.
Do a yearly or biannual review of your compensation policies with respect to PF, ESI, and labour code changes.
Use a compliance partner or legal advisor to check whether your pay components still meet statutory definitions.
When labor codes or EPFO or ESIC issue notifications, update your models proactively, not reactively.
6. Educate Your HR, Payroll & Leadership Teams
It’s not enough for your finance or payroll head to understand compliance. Everyone involved in compensation decisions should.
Run training sessions on how PF, ESI, and labour codes work.
Document your salary structure design principles in an “Employee Pay Policy” document.
Explain to managers why some components are non-negotiable (basic, DA) and others (special allowance) are more flexible — not just to preserve compliance, but to maintain equity.
Here are some real-world errors businesses fall prey to, backed by examples and why they’re risky:
Paying too little basic salary: If basic is too small (e.g., < 50% of CTC), PF gets calculated on a lower base. That hurts employee retirement corpus and may violate expected structure.
Ignoring ESI wage ceiling: Paying someone earning just under ₹21,000 without correctly calculating ESI contributions opens you to audit risk.
Mixing bonus or special allowance in PF base incorrectly: Only “basic + DA” usually count, not bonus.
Underpaying minimum wage: Without a state-wise wage check, you might accidentally undercut the legal floor.
Not maintaining proper records: Inspectors can demand wage registers, attendance, deductions. If you don’t have them — penalty.
Designing a compliant salary structure is more than staying out of trouble. It’s a signal — to your team — that:
You value them enough to play by the rules.
You assure their future (PF), health (ESI), and dignity.
You’re not playing fast and loose with their livelihood.
When employees trust that their salary model is fair and compliant, engagement goes up. Retention improves. Your reputation in the market strengthens. And, emotionally, every person feels they’re part of something responsible and human.
To build a legally sound and morally sensible salary structure, you must:
Identify components: Basic, allowances, variable, etc.
Calculate PF on the right base (basic + DA).
Include only eligible components for ESI and respect wage ceilings.
Align with minimum wage laws under the Code on Wages.
Maintain transparent documentation and payroll registers.
Audit regularly and adapt to legal changes.
Educate your teams about why structure matters.
When you do all this, you protect your company and your people. You avoid penalties, but more importantly, you build trust.
Building a salary structure that genuinely supports both business goals and employee well-being is never a one-time task. Laws evolve, state wage notifications shift, PF and ESI rules get updated, and expectations of fairness keep rising. As your organisation expands, these responsibilities grow heavier, not lighter.
While many companies try to manage compliance internally, it often demands more time and legal awareness than expected. A steady hand in the background can make the process smoother. That’s where teams like Team Management Services quietly add value — by helping businesses stay aligned with PF, ESI, and labour-code requirements without disrupting daily operations.
You stay focused on your people and growth. The complex compliance work stays clean, accurate, and consistently handled in the background. Subtle, sustainable support — exactly when and where it matters.
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