To design a pay structure in India, start with the 50% basic salary rule (mandatory under the Code on Wages 2019), benchmark against market rates for your industry and city, create 3-5 salary bands per role level, add tax-saving components like HRA and employer NPS, and configure the whole thing in your payroll software. You don’t need an HR consultant for this. You need a clear process and 2-3 hours.
Most Indian SMEs don’t have a designed pay structure at all. What they have is whatever number the founder agreed to during the hire, typed into an Excel sheet with a single column called “salary.” That works until you hit 15-20 employees. Then you start noticing that two people doing the same job are paid ₹7,000 apart, new hires get more than people who’ve been around for three years, and nobody can explain why.
For the basics of salary components (Basic, HRA, PF, ESIC, TDS), see our salary structure components guide. This blog is the how-to for building the structure from scratch.
Key Takeaways
- Basic salary must be at least 50% of CTC under the 2026 labour codes
- India Inc. projects a 9% average salary increment in 2026 (Aon, 2026)
- Build 3-5 salary bands per level with 20-30% range between minimum and maximum
- Add tax-saving components (HRA, NPS, meal vouchers) to reduce employee tax burden without increasing your cost
Step 1: Start With the Legal Minimum
Before anything else, check two numbers. First: the minimum wage for your state, industry, and skill classification. A security guard in Delhi has a different minimum than a machine operator in Pune. Second: the 50% basic rule. Under the Code on Wages 2019, basic + DA + retaining allowance must be at least half of total CTC. If you set basic any lower, you’re non-compliant from day one.
These aren’t suggestions. A textile manufacturer in Surat that sets basic at 30% of CTC is violating the law even if the total package is generous. EPFO auditors will catch the gap and demand back-payment of PF contributions calculated on the correct basic.
Under the Code on Wages 2019, Indian employers must set basic salary at a minimum of 50% of total CTC. This applies to all establishments regardless of size. Any salary structure with basic below this threshold is non-compliant, and EPFO auditors can demand back-payment of PF contributions calculated on the correct basic amount.
Once you’ve got these two floors (minimum wage and 50% basic), you have the bottom of your pay structure. Everything else builds upward from here.
Step 2: Benchmark Against the Market
You can’t design pay in a vacuum. You need to know what similar businesses in your city and industry are paying for the same roles.
India Inc. projects a 9% average salary increment in 2026, with manufacturing and automotive sectors seeing the highest hikes, as per the Aon survey cited above. Deloitte’s India Talent Outlook pegs it at 9.1%, with junior managers and professionals getting closer to 9.5% (Business Standard, 2026).
Where do you get benchmarks as an SME? You probably can’t afford an Aon or Mercer survey. But you can use:
- Naukri and Indeed salary insights for role-specific ranges in your city
- Michael Page India Salary Guide (free download, updated annually) for mid-to-senior roles (Michael Page, 2026)
- Industry associations like NASSCOM (IT), NRAI (restaurants), or local manufacturer associations that share compensation data among members
- Your own exit interview data telling you why people left and what they got paid elsewhere
A diagnostic lab chain in Pune found that their lab technicians were paid 12% below the Pune market average. They didn’t know this until three technicians quit in the same month and all cited salary as the reason. Benchmarking before you lose people is cheaper than replacing them.
What we see at Petpooja: When we onboard new Payroll clients, we often find that salary structures were set 3-4 years ago and never revised. A coaching institute in Jaipur with 35 faculty members hadn’t adjusted pay bands since 2022. Their senior teachers were earning less than freshers at competing institutes because the market moved but their structure didn’t.
Step 3: Create Salary Bands
Salary bands give you a minimum, midpoint, and maximum for each role level. They solve the “why is she paid more than me for the same job” problem.
A simple structure for a 30-50 employee business might look like this:
| Level | Example Roles | Monthly CTC Range | Band Width |
|---|---|---|---|
| L1 – Entry | Office boy, helper, peon | ₹12,000 – ₹16,000 | 33% |
| L2 – Junior | Data entry, junior technician, store assistant | ₹18,000 – ₹24,000 | 33% |
| L3 – Mid | Supervisor, senior technician, accountant | ₹28,000 – ₹38,000 | 36% |
| L4 – Senior | Department head, branch manager | ₹45,000 – ₹65,000 | 44% |
| L5 – Leadership | Operations head, finance head | ₹75,000 – ₹1,20,000 | 60% |
The band width (gap between minimum and maximum) typically widens as you go up. Entry-level roles have tight bands (25-35%) because the skill variation is small. Leadership roles have wider bands (50-60%) because experience and impact vary a lot.
Where you place someone within a band depends on their experience, performance, and what they were earning before. A new hire at L3 might start at ₹30,000 (near minimum). Someone who’s been at L3 for three years and performing well should be closer to ₹36,000 (near midpoint).
The overlap question: Should L2 maximum overlap with L3 minimum? In a small business, yes. A ₹2,000-4,000 overlap between bands gives you room to retain a strong L2 performer who isn’t ready for promotion but deserves a raise beyond the L2 midpoint. Without overlap, you’re forced to either promote too early or lose them.
Step 4: Add Tax-Saving Components to Your CTC
Once you’ve got the band and the total CTC number, you need to split it into components. This is where most SMEs make a mistake. They put everything into Basic + Special Allowance, which means the employee pays maximum tax.
A smarter split for the same CTC:
- Basic at 50% of CTC (mandatory under the wage code)
- HRA at 40% of Basic (tax-exempt for employees who pay rent, old regime)
- Employer NPS at 10% of Basic (tax-free under both regimes)
- Meal vouchers at ₹200/meal (tax-free under both regimes, up to ₹1,05,600/year)
- Special Allowance as the balancing figure (fully taxable)
A tax-optimised Indian CTC structure includes basic at 50% (mandatory), HRA at 40% of basic (tax-exempt under old regime), employer NPS at 10% of basic (tax-free under both regimes), and meal vouchers at ₹200/meal (tax-free under both regimes from April 2026, saving up to ₹1,05,600 annually).
We covered the tax maths behind each of these in our tax-saving salary components guide. The point here is that this restructuring costs you nothing extra. Same CTC. But your employees take home more because their tax bill drops.
Step 5: Configure It in Your Payroll System
This is where paper plans become real. You need to take those salary bands and component splits and put them into a system that calculates PF, ESIC, TDS, and professional tax correctly for every employee, every month.
Petpooja Payroll handles this through salary templates. You create a template for each level (L1 through L5), define the component percentages (basic 50%, HRA 40% of basic, employer NPS 10%, etc.), and assign the template to employees. When you hire someone new, you pick their level, enter the CTC, and the system breaks it into components on its own.
A manufacturing unit in Chakan with 80 employees set up five templates in Petpooja Payroll. Took them about 2 hours. Every new hire since then gets the correct structure from day one. No manual component calculation. No compliance gaps.
The system also handles the messy parts: different professional tax rules for branches in Maharashtra vs Karnataka, ESIC auto-detection when someone’s gross is under ₹21,000, and TDS recalculation when employees submit investment proofs mid-year. All of that runs on its own once configured.
Pricing is flat: ₹9,000 + GST/year new, ₹4,000 + GST renewals. No per-employee charges, so your cost stays the same whether you have 15 people or 80.
If you’re comparing payroll tools, check our 5 things to verify before outsourcing payroll.
Conclusion
Designing a pay structure for your Indian business comes down to five steps: check legal minimums (minimum wage + 50% basic), benchmark against the market, create salary bands with min-mid-max ranges, add tax-saving components (HRA, NPS, meal vouchers), and configure everything in payroll software. The whole thing can be done in a day.
The biggest mistake SMEs make isn’t getting the numbers wrong. It’s not having a structure at all and letting every hire negotiation create a new data point that nobody can justify six months later.
Petpooja Payroll can help you set up compliant salary templates for ₹9,000 + GST/year.
Frequently Asked Questions
Three to five bands work well for businesses with 15-80 employees. More than five creates unnecessary complexity at this stage. A typical setup: entry level, junior, mid-level, senior, and leadership. You can always add bands later as you grow past 100 people.
At least 50% of total CTC. That’s a legal requirement under the Code on Wages 2019, not a best practice. If your basic is below 50%, EPFO and ESIC calculations are wrong, and you’re exposed to back-payment claims and penalties during audits.
Free options: Naukri and Indeed salary insights for role-specific ranges, Michael Page India Salary Guide for mid-to-senior roles. Paid options: Aon, Mercer, and Deloitte publish annual compensation surveys. Industry associations (NASSCOM for IT, NRAI for restaurants) also share member compensation data.
Yes. Check legal minimums (minimum wage + 50% basic), benchmark 5-10 key roles against market data, create 3-5 salary bands, add tax-saving components (HRA, NPS, meal vouchers), and configure everything in payroll software like Petpooja Payroll. The whole process takes 2-3 hours for a 30-50 person business.
