Foreign businesses in India can have a challenging time comprehending and calculating the minimum wage as they differ in every state, and are categorized under multiple criteria, such as region, industry, skills level, and nature of work.

Contributing Advisor

Divyansh Shrivastava

Assistant Manager, Corporate Accounting Services

Both the central and state governments have control over fixing the minimum wages of employment. Wage rates of employment differ across occupations, skills, sectors, and regions. Given the extent of difference between various kind of employable work, there is no set wage rate that can be set for each specific work across the country.

This article addresses some frequently asked questions, including how minimum wages are calculated in India, what is the penalty for non-compliance, and what are some useful resources that hiring departments in foreign companies may refer to when assessing the country’s labor costs.

How is the minimum wage calculated in India?

India’s minimum wage and salary structure differs based on the following factors: state, area within the state based on development level (zone), industry, occupation, and skill-level. This offers foreign investors a range of options when choosing where to locate their set up.

India offers the most competitive labor costs in Asia, with the national-level minimum wage at around INR 178 (US$2.16) per day, which works out to INR 5340 (US$65) per month. This number is a floor-level wage – and the wage rate will vary depending on geographical areas and other criteria.

Businesses are advised to track the periodically updated minimum wage amount across various categories of employment, such as unskilled, semi-skilled, skilled, and highly skilled workers, in their respective state/city/zone of operation.

Each state government has the power to fix the minimum wage rates for the following:

• Time work;
• Piece work; and
• Overtime work.

Minimum wages for an employee are based on following parameters:

• Nature of employment;
• Industry;
• Geographic location; and
• Employee’s age.

Skills classification:

Unskilled

An unskilled employee is one who does work that involves the performance of simple duties, requiring little or no independent judgment or previous experience, although familiarity with the occupational environment is necessary. Their work may require physical exertion in addition to familiarity with a variety of articles or goods.

Semi-skilled

A semi-skilled worker is one who does work generally of a defined routine nature wherein the major requirement is not judgment or skill as others make important decisions. Their work is thus limited to the performance of routine operations of limited scope.

Skilled

A skilled employee is one who is capable of working efficiently in exercising considerable independent judgment and discharging their duties with responsibility. They must possess a thorough and comprehensive knowledge of the trade, craft, or industry in which they are employed.

Highly skilled

Highly skilled workers typically possess advanced education (college and higher) degrees or niche qualifications and the knowledge and skills to perform complicated tasks, have the ability to adapt quickly to technology changes, and are tasked with the creative application of knowledge and skills acquired through training in the work they perform.

Non-compliance penalty

Non-compliance of the minimum wage rules by employers will result in payment of a fine of INR 10,000 (US$136) and their possible imprisonment for up to five years.

Working hours

The maximum working hours normally range between eight to nine hours a day, depending on the city in which the employee works. Existing labor legislation grants a rest interval between working hours for employees.

The working day of a (unskilled/semi-skilled/skilled) adult worker shall be so arranged that inclusive of the interval of rest – it shall not exceed 12 hours on any day.

The below table summarizes the hours worked in a day and week with rest intervals, including meals for four metropolitan cities of India, according to the respective state-specific S&E Acts.

Overtime

Overtime payments are given to employees in the category of workmen in factories and commercial establishments prescribed by the concerned state authorities. Overtime wages are calculated at a rate of up to twice the normal wage under various acts, including S & E Act for various states.

Several statutes regulate overtime and overtime payment, and different legal acts provide for respectively different periods of working hours. Below are some of the relevant Acts that have different provisions for overtime payment and their violations. It may be noted that the following acts only apply to the workmen category.

How to structure a salary in India: Key components

Salaries often have different components, such as basic salary, allowances, perquisites, etc. It is important to understand how salaries are structured and the various methodologies associated with it while processing payroll.

While creating the ideal salary structure, the following things need to be considered:

Compliance with labor and payroll regulations

Compliance norms like minimum wages and social security provisions should be kept in mind while drafting the salary structure.

Cost to company

Companies use the term “cost to company” (CTC) to calculate the total cost to employ an individual (that is, all the costs associated with an employment contract). A major part of the CTC comprises compulsory deductibles. These include deductions for the Provident Fund, medical insurance, etc. For the company, CTC is a term that refers to expenses the company will spend on an employee in a particular year. The expense for the company is not necessarily just the salary amount paid to the employee. For employees, CTC is an amount projected by the company as salary but is never what is received by the employee in cash. This is understood as:

Basic Salary + Benefits + Allowances = Cost to the Company – Taxes – Deductions – Personal Deductions = Net Salary

CTC and taxability of various compensation components

Components of a CTC

• Fixed Salary;
• Variable Salary;
• Reimbursement;
• Social security contributions; and
• Stock options.

Fixed salary

It is linked with attendance or number of payable days of the employee, a major portion of the employee’s salary in hand.

Basic salary: It is 40 percent to 50 percent of CTC. Basic salary is fully taxable. Many statutory components such as provident fund, bonus, gratuity, etc. and other benefits as per company policy such as leave travel allowance, etc., are related to basic salary. Therefore, an increase and or decrease in basic salary may impact the CTC of the employee.

Dearness allowance (DA): It is mostly given to government employees, very few private companies use it as a salary component. In private companies, if DA is missing from the salary component, then consider the basic salary component as Basic + DA. Dearness allowance is paid to lower the impact of inflation. It is fully taxable.

House rent allowance (HRA): HRA is paid to the employee to meet expenses of renting a home. Normally companies keep it to 40 percent to 50 percent of the basic salary depending upon where you live.

In case the employee lives in a metropolitan city (New Delhi, Mumbai, Chennai, or Kolkata), then HRA will be kept to 50 percent of the basic salary, and in case the employee lives in a non-metro city, then HRA will be 40 percent of the basic salary. The taxability of HRA is depends on where the employee lives.

Variable salary

The variable salary is not fixed and depends upon the performance of an employee. Many companies pay this as part of their employees’ CTC.

Performance-based incentive: A performance-based incentive, if made part of CTC, is normally known as variable pay. Every company has a different policy to measure performance and allocate performance-based incentives.

Sales-based incentive: A sales-based incentive is given to employees who work in sales.

Profit-linked bonus: The employer links the bonus of the employee with the profitability of the company, project, or department. This also works as a retention tool and motivates the employee to ensure higher profitability at the same time.

Reimbursement

Reimbursement is paid to an employee for expenses incurred by employees either on behalf of the company or company-related activities. Every reimbursement should be seen differently in context of tax.

• Mobile/ internet expense;
• Books and periodicals;
• Meals/food coupons or meal pass; and
• Leave and travel allowance.

Social security contributions

Contributions made by the employer for the employee’s long-term saving schemes or social benefits scheme as per statutory compliance are exempt from income tax.

• Employee provident fund (EPF): The employer contributes 12 percent of basic salary against EPF. It is a statutory obligation on the part of the employer. The employee gets the benefit of PF deduction (12% of basic) at their part. The PF administration charges are to be borne entirely by the employer (0.50% of basic salary), which the employer needs to pay to RPFC in addition to 12 percent of basic salary. Contributions to the EPF scheme are obligatory for both the employer and the employee when the employee is earning up to INR 15,000 per month, and voluntary, when the employee earns more than this amount. If the pay of any employee exceeds this amount, the contribution payable by the employer will be limited to the amount payable on the first INR 15,000 only.

For establishments that employ less than 20 employees or meet specific conditions as notified by the Employees’ Provident Fund Organization (EPFO), under the Ministry of Labor and Employment, the contribution rate for both the employee and employer is limited to 10 percent.

• Employee state insurance (ESI): The employer needs to deposit 3.25 percent of gross salary of the employee in case employee’s gross salary is less than INR 21,000. Hence, employer keeps it as part of employee CTC. 0.75 percent of gross gets deducted from the employee’s gross salary which decreases their in-hand salary by that amount. There is no tax benefit associated with ESI contributions or deductions.

• Gratuity: Gratuity is paid to the employee once employee completes five years of continuous service or in the case of employee death irrespective of completion of five years. It is a statutory liability of the employer. Hence many employers keep this component as part of employee CTC.

Statutory bonus

The procedure of payment of a bonus to the employees is as per the Payment of Bonus Act, 1965 and is applicable to:

• Any factory employing 10 or more persons where any processing is carried out with the aid of power; and
• Other establishments (established for the purpose of profit) employing 20 or more persons.

Every employee who is not drawing salary/wages beyond INR 21,000 per month who has worked for not less than 30 days in an accounting year, shall be eligible for a bonus of a minimum of 8.33 percent of salary/wages or INR 100, whichever is higher, and INR 60 if the employee’s age is less than 15 at the beginning of the assessment year.

The bonus is to be paid even if there is a loss in the establishment, and its limit is fixed at a maximum of 20 percent of the employee’s salary/wages. In the case of employees whose salary/wages range from INR 7,000 to INR 21,000 per month for the purpose of the payment of a bonus, their salaries/wages would be deemed to be as INR 7,000. The bonus amount is fully taxable.

Stock options

Many companies provide stock options to employees under an Employee Stock Option Plan (ESOP). ESOPs are plans under which employees receive the right to purchase a certain number of shares in the company at a predetermined price, as a reward for their performance and as motivation for employees to keep improving their performance. Employees typically have to wait for a certain duration known as the vesting period before they can exercise the right to purchase the shares.

ESOPs are taxed at two instances:

• At the time of exercise – as a perquisite: ESOPs would be taxed as perquisite, the value of which would be (on date of allotment) = (FMV per share – Exercise price per share) x number of shares allotted. The employer deducts TDS on this perquisite, and this is reflected in the employee’s Form 16 and included as part of total income from salary in the tax return. The TDS on the ‘perquisite’ stands deferred to earlier of the following events:

• Expiry of five years from the year of allotment of ESOPs;
• Date of sale of the ESOPs by the employee; and
• Date of termination of employment. 
• At the time of sale by the employee – as a capital gain: The employee may choose to sell the shares once these are bought. If the employee sells these shares, it triggers a tax liability. The difference between the sale price and FMV on the exercise date is taxed as capital gains.