Salary Components — Earnings & Deductions

Salary components are the individual building blocks of an employee's compensation. Every line item on a payslip — from Basic Pay to Provident Fund deduction — is a salary component. Configuring salary components correctly is the foundation of accurate payroll processing.

This chapter covers the concepts behind earnings and deductions, how to create and manage salary components in Udyamo HRMS, and the common Indian compensation components you should set up.

What You Will Learn

• The difference between earnings and deductions
• How to navigate to salary component settings
• How to create a new salary component
• Calculation methods: fixed amount vs. percentage
• Taxability configuration for components
• Common Indian salary components and their configurations
• How to edit, reorder, and delete components
• How components flow into payslips

Prerequisites

Required: You must have an Administrator role. The Payroll feature toggle must be enabled under Settings > Features. Your organization's fiscal year and pay schedule should be configured. See Chapter 8: Work Week, Timezone & Fiscal Year.

Understanding Earnings and Deductions

An employee's salary is composed of two categories of components:

Earnings

Earnings are amounts added to the employee's compensation. They represent what the employee receives.

Deductions

Deductions are amounts subtracted from the employee's gross pay. They represent statutory obligations, employee contributions, or other withholdings.

Gross Pay and Net Pay

The relationship between components, gross pay, and net pay is:

Gross Pay = Sum of all Earnings

Net Pay = Gross Pay - Sum of all Deductions

Navigating to Salary Components

To access salary component settings:

1. Click Settings in the left sidebar.
2. Select Salary Components.

The Salary Components page displays all configured components in a list, organized by type (Earnings and Deductions).

Creating a New Salary Component

To create a salary component:

1. Navigate to Settings > Salary Components.
2. Click Add Component (or Add Earning / Add Deduction).
3. Fill in the component details.
4. Click Save.

Component Fields

Calculation Methods

Fixed Amount

The component has a specific monetary value (e.g., Basic Pay = INR 25,000 per month). The amount is defined in the salary structure or at the employee level.

Percentage-Based

The component is calculated as a percentage of another component (usually Basic Pay). For example:

• HRA = 50% of Basic Pay
• PF Employee Contribution = 12% of Basic Pay
• ESI Employee Contribution = 0.75% of Gross Pay

Example: If Basic Pay is INR 25,000:

• HRA at 50% = INR 12,500
• PF at 12% = INR 3,000

Tip: Use percentage-based calculations for components that should scale with Basic Pay. This ensures that when an employee's Basic Pay increases (e.g., during an appraisal), all percentage-based components adjust automatically.

Taxability

The Taxable setting determines whether the component is included in the employee's taxable income for TDS calculation purposes.

Warning: Tax rules for salary components are governed by the Income Tax Act and change periodically. Consult your organization's tax advisor or chartered accountant when configuring taxability settings. Incorrect configuration can lead to over- or under-deduction of TDS.

Common Indian Salary Components

The following table lists salary components commonly used by Indian organizations. Use this as a reference when setting up your salary structure.

Earnings

Deductions

Step-by-Step: Creating Basic Pay

1. Navigate to Settings > Salary Components.
2. Click Add Earning.
3. Enter the following:
   • Name: Basic Pay
   • Type: Earning
   • Calculation Method: Fixed
   • Taxable: Yes
   • Active: Yes
4. Click Save.

Step-by-Step: Creating HRA

1. Navigate to Settings > Salary Components.
2. Click Add Earning.
3. Enter the following:
   • Name: House Rent Allowance
   • Type: Earning
   • Calculation Method: Percentage
   • Percentage Of: Basic Pay
   • Default Percentage: 50%
   • Taxable: Partially Exempt
   • Active: Yes
4. Click Save.

Step-by-Step: Creating PF Employee Contribution

1. Navigate to Settings > Salary Components.
2. Click Add Deduction.
3. Enter the following:
   • Name: PF Employee Contribution
   • Type: Deduction
   • Calculation Method: Percentage
   • Percentage Of: Basic Pay
   • Default Percentage: 12%
   • Taxable: No (PF contributions are tax-exempt up to limits)
   • Active: Yes
4. Click Save.

Editing a Salary Component

To modify an existing component:

1. Navigate to Settings > Salary Components.
2. Click on the component name or the Edit icon.
3. Update the desired fields.
4. Click Save.

Impact of Edits

Warning: Changing a salary component's calculation method or taxability mid-year can cause inconsistencies in annual tax calculations. If possible, make such changes at the start of a fiscal year.

Component Ordering

The order in which salary components appear on the payslip matters for readability. Udyamo HRMS allows you to control the display order.

Reordering Components

1. Navigate to Settings > Salary Components.
2. Use the drag-and-drop handles (or order field) to arrange components.
3. Click Save Order.

Recommended Order

Earnings:

1. Basic Pay
2. HRA
3. Dearness Allowance
4. Conveyance Allowance
5. Special Allowance
6. Other Allowances
7. Performance Bonus / Variable Pay

Deductions:

1. PF Employee Contribution
2. ESI Employee Contribution
3. Professional Tax
4. TDS (Income Tax)
5. Loan EMI
6. Other Deductions

Deleting a Salary Component

To delete a component:

1. Navigate to Settings > Salary Components.
2. Click the Delete icon next to the component.
3. Confirm the deletion.

Deletion Restrictions

A salary component cannot be deleted if:

• It is referenced in any salary structure.
• It has been used in any processed payroll record.
• It is assigned to any employee's salary breakdown.

If you need to retire a component, deactivate it instead of deleting it. Deactivated components are excluded from future payroll runs but remain in the system for historical reference.

Tip: Before deleting a component, check if it is used in any active salary structure by navigating to Salary Structures and reviewing the component lists.

How Components Flow into Payslips

Understanding the data flow from component configuration to the final payslip:

1. Salary components are created in Settings.
2. Salary structures group components into templates (see Chapter 27).
3. Employee salary assignments map a structure (and specific amounts) to each employee.
4. During payrun processing (see Chapter 28), the system calculates each component based on the employee's assignment, paid days, and LOP.
5. The calculated values appear on the payslip (see Chapter 29).

Salary Components (Settings)
        |
        v
Salary Structures (Templates)
        |
        v
Employee Salary Assignment (Individual)
        |
        v
Payrun Processing (Monthly)
        |
        v
Payslip (Output)

Best Practices

1. Mirror your CTC structure. Your salary components should reflect the actual Cost to Company (CTC) breakdown your organization uses for offer letters and appraisals.
2. Use percentage-based calculations where possible. This reduces the number of manual updates needed during salary revisions.
3. Get tax configuration reviewed. Have a chartered accountant or tax advisor verify the taxability settings for all components.
4. Keep the component list manageable. Most organizations need 8 -- 15 components. Overly granular breakdowns complicate payroll and confuse employees.
5. Document your components. Maintain an internal reference that explains what each component represents, how it is calculated, and its tax treatment.

What Comes Next

With salary components defined, the next step is to organize them into salary structures that serve as templates for different employee grades. Proceed to Chapter 27: Salary Structures.