Payroll Cut Types

Payroll Cut Types

The economy has slowed due to recession, COVID, rising interest rates, and other factors. As a result, almost every industry has been impacted.

Employee layoffs, salary reductions, and a lack of fresh job opportunities generate headlines at various businesses. A large number of employees and executives have also been assigned to work for less pay.

Companies are cutting non-wage expenditures and exploring different methods to utilize excess workforce as part of their pay cuts.

Though pay cuts are implemented in a variety of ways, the following are the three most common techniques used by businesses:

CTC Reduction Method

The cost to the company, or CTC, is the amount of money an employer spends to recruit a new employee.

It consists of many components added to the basic pay, such as HRA, medical insurance, provident fund, etc.

Meal coupons, transportation, and subsidized loans are examples of allowances given under this.

It is computed by adding the employee’s pay to the total cost of any added benefits received during the service year.

For example, if an employee’s salary is ₹100,000 and the company pays an additional ₹10,000 for their health insurance, ₹5000 for the HRA, the final CTC is ₹115,000.

Now, when the company decides to cut the same salary, it changes the overall CTC.

So if the salary is deducted by 10%, the HRA will also be reduced, such as the health insurance allowance. So the new CTC will be ₹103500.

Basic salary₹100,000₹90000 
Health Insurance₹10,000₹9000 
HRA₹5000 ₹4500
Total₹115000 ₹103500

If the employee receives additional perks like transportation cost, a PF account, or filing any tax compliance, there will be changes in all the figures.

The finance department makes the final decision on the percentage of CTC reduction. You can use Kredily’s online HR payroll software to make these calculations easier.

Deduction component method

This form of payroll deduction is used for a variety of reasons.

Though it is not a common practice, many businesses will add a new component to take a specific amount from an employee’s paycheck.

It’s either for a social cause or some other reason. For example, many firms have recently begun deducting salaries under the name of COVID.

Because the lockdown compelled nearly every company to shut down for a certain amount of time, all productive work came to a halt.

As a result, it is nearly impossible for companies to make full payments to their employees.

Deduction in benefits raises, and bonuses

Instead of reducing basic salary, many companies reduce employee perks, increases, and bonuses. Many companies have been forced to operate from home as a result of the epidemic.

Travel allowances granted to attend meetings may suddenly become a financial burden for businesses.

As a result, many companies are slashing travel expenditures from their overall CTC.

Bonuses provided during festivals and other special occasions are also deducted as part of this salary reduction. It is no longer possible to offer raises based on the requested amount.

Though employees are never ready to accept this deduction, they accept it as part of sharing the pandemic loss.

Employees rarely welcome salary reductions. Payroll deduction has several disadvantages and is opposed by both employees and labor unions.

However, when the entire world is in the grip of a pandemic, it is preferable to accept a low salary than lose a job.

Our opinion:

If your company considers going for a pay cut, you must inform your employees before going for the same.

Give them a valid reason for deducting their salary.

Try to make a pay cut that results in a lower income tax rate since this will provide some relief.

Instead of deducting their basic monthly income, make deductions from their bonuses or perks. Use online payroll software to do cost-effective calculations. 

Sharing the pain of financial loss should be the responsibility of both the employer and the employee.

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