What is the use of bifurcating salaries into many parts? Can Gross be divided into 2 parts as Basic + DA and HRA?

What is the use of bifurcating salaries into many parts?

Example - If the gross salary for new employees is 15000/-. Isn't it more convenient for the employer to keep it as 15000/- rather than breaking it up? With this salary, the employer does not need to pay any PF; only ESI would be enough. However, if the salary is broken into parts, the employer will have to pay both ESI and PF.

Another Query - How to handle situations where new employees join and do not agree to have PF and ESI amounts deducted from their salary? Does the employer need to cover both sides' contributions in such cases? This scenario often occurs in small shops.

Also, can Gross salary be divided into 2 parts as Basic + DA and HRA? Is this acceptable? Can we combine and display Basic + DA together? Is there a fixed proportion for Basic/DA/HRA, or can we determine any proportion? Does this combining of components negatively impact the firm in any way?

Dear Friend,

First, we have to understand the concept of wages. The share of the produce paid to labor for its production activity under the contract of employment, either express or implied, is called 'wages'. It was in kind only in the barter economy. When money has become the medium of exchange, the concept of wages changed into (1) Nominal Wage or Money Wages and (2) Real Wage. While the first one refers to the total amount of money paid to labor in the process of production, the second one, i.e., real wage means the translation of money wages into real terms or in terms of commodities and services that money can buy. It follows, therefore, that though money wages remain the same, real wages are reduced by the hike in the prices of commodities and services. The inevitable conclusion thus becomes that real wages also include extra supplementary benefits along with the money wages. Hence the bifurcation.

Base or primary wages refer to the basic pay which is fixed in the wage/salary structure. Supplementary compensation in the structure refers to fringe benefits such as housing, medical aid, paid leave, retirement benefits, etc., paid in addition to basic wages. Normally, the fringe benefits which have to be paid periodically along with basic wages to keep the money wages on par with real wages are called allowances. Of these allowances, those allowances viz., dearness allowance, retention allowance are taken into account along with basic wages for the purpose of computation of fringe benefits like bonus, gratuity, contributions to social security measures. In the absence of bifurcation, the entire gross wages should be taken into account for the calculation of fringe benefits which are the indirect financial commitments of the employer. That's the reasoning for the bifurcation of the wage/salary into basic and other allowances. There is no statutory compulsion for the bifurcation of wages for wages is to be taken as a single package only as a mutual consideration under the contract of employment. However, to curb the tendency of tactful avoidance of indirect commitments by some employers by means of the bifurcation of the wage structure, the Code on Wages, 2019 has redefined the term wages u/s 2(y) which you should go through to find out the answer for your last query.