Part 2 · Running the business · Chapter 2.7
Salary and incentives
Draft: the wording may change. Tax rules change every year, so check current rates and dates on the official portal before you act.
The idea
Salary is rent: a fixed amount for a person's time, paid whether the month was good or bad. An incentive is a share of the harvest: paid only when the result comes in. Pay the rent on time and in full; pay the harvest only on what was actually harvested. Then take out the deductions the law asks for — PF, ESI, professional tax and TDS — and deposit them on time.
Rent and harvest at the counter
A beat salesman's October:
| ₹ | |
|---|---|
| Fixed salary (rent) | 15,000 |
| Incentive: 1% of collections of ₹3,00,000 (harvest) | 3,000 |
| Gross pay | 18,000 |
The incentive is on money collected, not on goods billed. Chapter 2.1 explained why: a sale is finished only when the cash is in hand. If you pay incentive on billing, a salesman can earn it by giving credit to a shop that never pays.
Write the incentive rule down before the month starts — what counts, what rate, what happens to returns and bad debts — and give the salesman a copy. A rule changed after the harvest feels like cheating, even when it isn't.
The four deductions
| Deduction | What it is | Who pays |
|---|---|---|
| PF (Provident Fund) | Retirement savings, run by EPFO | Employee share from salary; employer adds its own share |
| ESI (Employees' State Insurance) | Medical and sickness cover, run by ESIC | Employee share from salary; employer adds its own share |
| PT (Professional Tax) | A small state tax on earnings; in Tamil Nadu it is collected by the local body, usually every half-year | Deducted from salary |
| TDS on salary | Advance income tax on the employee's pay, if their yearly income is taxable | Deducted from salary (chapter 1.17) |
Whether your business must register for PF and ESI depends on how many people you employ. Which employees are covered depends on their pay. The rates, limits and due dates are set by EPFO, ESIC, your local body and the Income Tax Department, and they change. India's new labour codes have also changed some definitions, such as what counts as "wages". Take the current figures from the EPFO and ESIC portals, your local body and incometax.gov.in, or from your payroll consultant.
In the books
Say the employee's deductions for October come to ₹2,000 in total (the real figure depends on the current rates).
| Document | Debit | Credit |
|---|---|---|
| October payroll | Salary 15,000; Incentive 3,000 | Salesman 16,000; PF, ESI, PT, TDS Payable 2,000 |
| Employer's share of PF and ESI | Employer contribution (expense) | PF and ESI Payable |
| Salary paid by bank | Salesman 16,000 | Bank 16,000 |
| Deductions deposited | PF, ESI, PT, TDS Payable | Bank |
Two things to notice. The full ₹18,000 is the expense, not the ₹16,000 the salesman takes home. And the employer's share of PF and ESI is a cost on top of gross pay. Count it when you decide whether you can afford one more salesman.
The money in the payable accounts belongs to the employee and the government. Deposit it by each due date. Late deposits carry interest and penalties, and an employee whose PF was deducted but never deposited has a real grievance against you.
Common mistake
Paying incentive on billing instead of collection. The salesman pushes stock on credit to shops that are already slow to pay. You pay ₹3,000 incentive this month, and three months later write off ₹40,000 of bills that were never collected. Rent is paid for time; the harvest is paid only when it is in the barn.
Where you'll use this
In Part 3, salesman incentives get more detailed: by brand, by product, by outlets covered, and often part-funded by the company. Each scheme is still rent plus harvest, and each one needs its rule written down before the month starts.
Check yourself
- A salesman's fixed salary is ₹12,000 and his incentive is ₹2,500. Deductions are ₹1,500. What is the total pay expense in the books?
- Why should incentive be on collections and not on billing?
- Is the employer's share of PF part of the employee's gross pay?
Answers
- ₹14,500 — the gross pay. He takes home ₹13,000; the ₹1,500 goes to the payable accounts.
- Because a sale is finished only when the money is in. Billing incentives reward credit to shops that may never pay.
- No. It is an extra cost to the employer on top of gross pay.