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Here are the steps to define your salary components:
Click the Gear icon > Payroll Settings.
Click Salary Components to view salary components which are present in the system. Some of these are automatically created for you.
Click New to create a new component.
Name: Enter the name of the component. E.g. - Basic, House Rent Allowance, Conveyance Allowance, Special Allowance, Leave Travel Allowance, Medical Reimbursements, etc
Abbreviation: Enter the short form of the component. E.g. - “Conv” for Conveyance, “MedRemb” for Medical Reimbursements, “SplAll” for Special Allowance, etc. Abbreviations are used when generating reports.
Note: Do not use spaces or special characters. It should also be one word (7 characters or less).
JV Code: Ignore this field.
Effective Date: This is required to keep track of when the created component is effective from. By default, the date shown is the 1st of April, but there is an option to change the date if the component is created during the year.
Paid Component: This feature should be checked if the component is part of employee salary earnings/deductions. E.g. Basic, HRA, other deductions etc.
This option should stay unchecked while creating components like Employer PF / ESI, for any salary paid outside of the defined salary structure, and components part of tax calculations, like non paid components.
Map To: The created components are to be mapped for a specific process. E.g., while creating an HRA, map to IT HRA. The HRA exemption would be calculated as per this mapping. Also, while creating Dearness Allowance, map to DA. Then, the HRA exemption will be calculated on Basic + DA. Another example is during creation of Voluntary Provident Fund component, this has to be mapped to VPF so it can appear in the PF Report as well as get exempted as per Section 80C.
Variable / Fixed Component: A component whose value doesn’t change every month is a fixed component. E.g.- Basic, HRA, Conveyance, Medical Reimbursement etc. Components like bonus, incentives, salary advance etc., which are paid once or change month after month, are variable components.
Pay Type: There are 5 pay types: Earnings, Deductions, Reimbursement, Overtime and Statutory Component.
Earnings: As the name suggests, components like Basic, HRA, Conveyance, etc., are earning components
Deductions: Select this if the component is a type of recovery or withholding like Salary Advance Recovery, HRA Recovery, Basic Recovery, etc.
Reimbursement: Select this if the component is a reimbursement of expenses incurred by the employee.
Overtime: Select this to create an overtime pay component. This will further be used when an employee is to be paid for overtime hours worked.
Statutory Component: If the component is PT, PF, or ESI, with respect to government rule, then select this pay type.
Taxable / Non taxable: Select whether the component is taxable or not. E.g., if the component is Basic, HRA, Conveyance, Special Allowance, etc, then select “Taxable.” If the component is a type of reimbursement like Food Coupon, Salary Advance, etc, then select “Non-taxable”.
Tax is distributed across the year: This is an option to choose whether the tax arising out of this component has to be deducted in the same month or to be distributed across the year. E.g., components like Basic, HRA, Conveyance, etc have to be checked as they are compulsory for tax computation and tax should be distributed across the year instead of being collected in one go.
Round-off value: Select from the drop-down list as per process followed. Select None if the amount is to be shown without rounding off.
Show in payslip: Check if the component is to be shown on payslips as per company policy.
Is an FBP component: Check if the component is part of the Flexible Benefit Plan.
Attendance dependent: Salary is prorated based on employee attendance.
Create Dependent Component: Changes to salary with retrospective effect may cause an employee to be eligible for arrears or be liable for recovery. The arrears/recovery component will automatically get created if this option is enabled.
Part of CTC: Check if the component is part of the offered CTC.
Is Active: If active, it will appear in the salary register.
Is an FFS component: Check if this component is to be used in full and final settlement during employee separation.
There are 3 types of Calculations- Flat, Formula & Slab-based.
A) If Flat is selected, then enter a value in the Value/Formula box. For example, components like Conveyance, Medical Reimbursement etc can have a stipulate monthly amount that is paid out to employees.
Please note that this box shouldn’t be left blank.
B) If Formula is selected:
Click Formula to open the Formula Builder. Defining a formula is done similar to how it is done in other programs like Microsoft Excel. Select an appropriate option from Brackets, Abbreviation & Operators, click Add, and then Validate it.
For HRA component, the formula may look like: BASIC* 30% or BASIC* 40% or (BASIC + BASICAR – BASICREC)* 30% depending on policy followed.
For PF component, the Formula may look like: BASIC* 12%, (BASIC + BASICAR – BASICREC)* 12% and so on.
Clicking Validate will show Valid Expression show if the formula is logically acceptable.
If the formula defined is incorrect, then Invalid Expression appears. Try to redefine the formula and validate it until Valid Expression appears.
C) If Slab Wise is selected:
1. Enter slab ranges and rate/amount, if the calculation type is selected as Slab based.
2. Enter 0 in the Value/Formula.
3. From Value: Enter the starting amount of the slab; it is 0 to start with.
4. To Value: Enter the maximum limit of that slab.
5. To add more slabs, click on Add Row.
6. In the 2nd slab and thereon, From Value will display the maximum amount entered in the previous slab. Enter the maximum limit in To Value.
7. Click on Add to save the component.
Reimbursement tab - If the Pay Type is Reimbursement, configure the reimbursement based on company policy and whether it needs to be carried forward or not and enter the maximum reimbursement amount per month
Overtime tab - If the Pay Type is overtime, select whether overtime is calculated in Days or Hours and the maximum overtime units as per unit of measure selected.
Salary Components Allocation
Salary components, once created, must be allocated to employees to whom they apply.
To allocate salary components:
1. Click Payroll Settings > Salary Components > Pay Allocation
2. The Assign Pay Component page will be displayed.
3. Select a Pay Component from the drop down list.
4. Resigned Employee: If this checkbox is empty, the salary component will applicable only for existing employees.
5. If this box is checked, salary components can made applicable for resigned employees as well.
6. Select Month: Select any month from the dropdown.
7. Select Branch from the drop-down.
8. Advanced Search - Enter the complete Employee Code or Employee Name and press List to see the employee.
9. Check the employee(s) the selected salary component is applicable to, and click Save. The component will now be available for the employee in the Master table.