As an employer, it is important to know that compensation to your personnel includes more than their basic pays. It comprises several potentially taxable benefits.
Having an understanding of which types of compensations are included in remuneration and its tax implications is beneficial. It helps you to make an informed decision on the benefits you would like to offer your employees. Read on to know more about remuneration.
What is remuneration?
Remuneration is the total compensation paid to the employees for their services. In addition to the basic salary, it includes benefits like commissions, bonuses, overtime pays, and other financial compensation paid by the employers to their personnel.
Perks may or may not be a component of the employees' compensation. For example, a generous holiday plan and an on-site gymnasium are perks but these do not offer any monetary benefits to the employees.
Therefore, it can include direct monetary payouts or other taxable fringe benefits like the use of a corporate vehicle.
How does remuneration work?
Companies can set up their own structures for the remuneration of employees as long as these adhere to the government rules and regulations. Some of these are as follows:
- Working hours can vary from one state to another; however, the national standard is set at a maximum of nine hours per day and 48 hours per week; any additional hours are compensated at double the normal rate.
- Employees shouldn’t work more than two hours per day as overtime.
- There is a national minimum wage rate, which is INR 176 per day in 2021; however, some state and local governments may apply their own minimum wage rates based on the skills of the employees and industries.
- Several workers are eligible for statutory bonuses; employees working in a company that employs at least 20 people and earns less than INR 10,000 per month are entitled to receive bonuses between 8.33% and 20% of their yearly salary.
- Employees who have worked for at least five years with a company are eligible for a severance pay calculated as 15 days' wages for every year of employment.
Different types of remuneration
There are different types of remuneration based on the type of worker and the kind of work they do. Some of these include the following:
The basic salary is the base compensation paid to the employees and often comprises between 35% and 50% of the total pay. It is a pre-determined amount paid before any increases or reductions.
Wages are monetary compensations paid to the employees in exchange for completed work or providing a service. The amount can be fixed (piece rate or task wage) for every task that is to be completed.
Wages can also be paid at an hourly or daily rate (wage labor) or based on any other measurable quantity of completed work.
In addition to the regular salary remuneration, some employers may offer sales commissions to their people. Some companies may offer only commission-based jobs where the compensation varies based on different work variables, which are often determined by the employers.
For example, the commission may depend on the quantum of sales, frequency of sales, number of customers brought, and performance. The commission is generally a percentage of the pre-determined variable.
Bonus is generally the compensation given to employees over and above their annual remuneration. This amount is paid in addition to the base salary of the employees and may be used as a reward or recognition of the employees’ achievements.
Bonuses can be variable; however, most often these are performance-based. This means that companies distribute bonuses based on the performance of individual employees or team contributions.
Most bonuses are discretionary where the manager decides on who is eligible to receive it and the quantum. Non-discretionary bonuses are a part of the employee contract.
Incentives are used for motivating the employees to improve their performance. These can be cash or non-cash incentives and may comprise part of the managerial remuneration.
Some examples of non-cash incentives include wellness programs, trips, and even stock options.
It is a fixed amount paid to the employees in addition to the basic monthly remuneration to meet some predefined criteria. Special allowances vary from one company to another.
Some companies offer it as an allowance to their people for meeting certain expenses for the efficient performance of their duties.
This is the amount distributed to the company’s shareholders and is a method for distributing profits amongst them.
Companies that have consistent earnings over the years often pay dividends to their shareholders, which increases their confidence in the organizations. Dividends are paid either in cash or in additional stock.
To sum it up, remuneration is the compensation paid to the employees and may comprise basic salary or hourly pay, commissions, bonuses, incentives, and other payments.
It is the sum of the total income and other taxable allowances and benefits.
Frequently Asked Questions (FAQs)
What are the different types of remuneration?
At the base level, compensation is either a salary or an hourly pay or job rate (for contractual work). Some employees may receive commissions, bonuses, and other fringe benefits.
The executives’ and directors’ remuneration can comprise several perks like personal use of company vehicles.
What is the difference between remuneration and salary?
For many individuals, both of these are the same wherein they are paid a flat salary or compensated at an hourly rate. For others, salary comprises a component of their overall compensation, which in some cases may be a minor component.
For example, sales personnel often receive a smaller fixed salary and the majority of their earnings are via sales commissions. A few professionals may receive a token salary but are eligible for huge year-end bonuses based on their performance.
Knowing the different types of remuneration in management terms is important to make an informed decision.
How is remuneration determined?
Companies are free to structure their compensation structures that adhere to the regulatory rules and regulations.
Additionally, companies have to treat all their personnel equally irrespective of their caste, sex, or religion.
What is the meaning of a remuneration package?
It refers to the total compensation received by an employee in exchange for completing their work or delivering the required services.
Such packages include salary or wages, travel allowance, bonus and incentives, commissions, stock options, and other similar benefits.
Are bonuses a component of the salary?
Bonuses are usually calculated as a percent of the basic salary. Therefore, employees who have a higher basic salary are eligible to receive more bonuses and vice versa.
The minimum and maximum rate as per the Government guidelines is 8.33% and 20%, respectively.
How are bonuses taxed?
Bonuses are subject to taxes; however, the amount is not directly added to the employees’ incomes. Bonuses are considered supplemental income and taxed at the federal withholding rate of 22%.
What are special allowances?
These are fixed amounts paid to the employees in addition to their salaries to meet certain criteria and have different categories, which include personal and official allowances.
How are dividends paid?
Dividends are paid to the shareholders on a particular day and some important dates include announcement date, ex-dividend date, payment date, and record date.
Are dividends taxable?
Yes, dividends are added to the receivers’ income and taxed as per the applicable income tax slab rate.
For dividends exceeding INR 5,000, the payer also deducts tax deducted at source (TDS) at the applicable rate.
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