Receiving that email or SMS notification that says — “Your salary is credited” — brings a lot of joy after a month-long hard work, but how well do we know our salary?
The salary slip is quite a useful document to have, as besides being a statement of your take-home salary, it has other information like your date of joining, employee code, PAN, PF Account No, bank details, leave balance which can be referenced quickly if needed. The salary slip is also commonly used as an income proof when you’re applying for a loan or credit card.
That being said, we still do not understand the many terms that are stamped on our salary slips. While we do feel good about our salary, it is essential we know how it is structured. Here’s when the challenge arises. The confusion mostly stems from comparing the CTC (Cost to Company) in your offer letter to the net salary or take-home salary. Let’s tackle them one by one -
CTC or Cost to Company — This is your annual Cost-to-Company which includes pre-tax benefits, and savings contributions. This may consist of PF, Health Insurance, Meal coupons, transport expenses, etc.
Gross Salary — This is your total earnings of the month without any deductions.
Net Salary — This is your take-home salary after all the income tax deductions.
Now that we have understood these standard terms, let’s move onto some of the other components in your salary slip.
Your salary slips are divided into two main categories —
Income/Earnings/Reimbursements and Deductions which are then, further divided into more components.
The components that form part of the Income/Earnings group are -
- Basic Salary
- House Rent Allowance
- Dearness Allowance
- Standard Allowance
- Conveyance Allowance
- Medical Allowance
- Special Allowance
The components that form part of the Deductions group are -
- Professional tax
- Tax Deducted at Source
- Employee Provident Fund
Now let’s delve into each of these categories:
INCOME
Basic Salary
This is the fixed component of your salary which comprises of 40%-50% of the CTC. Based on the basic salary, the HRA, EPF, Gratuity, etc. are then calculated.
House Rent Allowance (HRA)
HRA is usually 40%-50% of the basic salary. It is an allowance which helps you pay the house rent. This is a taxable component, and if you live in rented accommodation, you can claim a part of the HRA as a tax deduction.
The tax exemption part of the HRA (House Rent Allowance) is the minimum of the following amounts:
- Actual HRA component of salary
- 50% of basic salary if he resides in Delhi, Chennai, Kolkata, or Mumbai; 40% if his residence is in any other city
- Actual rent paid less 10% of basic salary
Conveyance/Travel allowance
This allowance is paid when the company does not provide free transportation. Most companies cap this amount at Rs 19,200 per annum (Rs 1,600 per month), which is the maximum amount deductible for tax. You don’t need to submit any bills or provide proof of receiving conveyance allowance from your employer. You can claim the entire amount of Rs 1,600 per month as tax exemption.
Children Education Allowance
This allowance varies from company to company, but the tax exemption is capped at Rs 100 per month for maximum, two children.
Medical Allowance
This allowance is fixed at Rs. 1,250 per month (Rs. 15,000 per annum) — which is the maximum amount you can claim as reimbursement for medical expenses for yourself or your dependents. You must submit your medical bills to claim tax exemption. If you don’t, the entire amount is added to your taxable income.
Standard Deduction
Standard Deduction was reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. Now, you can claim a flat Rs 50,000 (according to Budget 2019), thereby reducing the tax charged.
Leave Travel Allowance (LTA)
The amount under this allowance can be claimed as a tax deduction twice in 4 years. The current block is from 2018–2021. You need to provide bills for travel incurred by you or with your dependents.
Bonus/Performance Allowance
The bonus is an amount paid depending on your performance. This allowance is entirely taxable. Performance bonus is linked to the appraisal ratings or your performance during a specific period and is based on the company policy.
Special Allowance
Special allowance is a fixed amount given to employees over the basic salary to meet specific requirements. This allowance is fully taxable.
Dearness Allowance
Dearness Allowance refers to the cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. Hence it is different for different locations. It is usually 30–40% of the basic pay and is directly based on the cost of living. For income tax, basic and DA are considered as pay. Therefore it is taxable.
Deductions
Professional Tax
Professional tax is levied by the state government which is to be paid by every single earning individual. The calculation of the amount differs from one state to another but is capped at Rs 2,500 per year.
Employee Contribution to Provident Fund
Provident Fund is a government initiative meant to incentivise savings. Any organisation that has 20 or more employees is required to subscribe to provide this for which they can claim exemption too.
The contribution each month is 12% of your basic salary, which is matched by your employer and deposited to your provident fund account, which you get after your retirement. The employee contribution can be claimed as a tax deduction under Section 80C.
Income Tax/Tax Deducted At Source
This is the amount deducted towards payment of income tax. At the beginning of the financial year, you are required to submit a declaration to your company’s accounts department, giving them your tax-saving investments for the year. Based on this, your tax liability is calculated and deducted every month.
*Most companies require you to begin submitting proof of investments by January so that tax liability can be recalculated if necessary, and the revised amount can be adjusted in salary payable from January to March.
Loans/Advances
If you have availed of a loan or advance from the company, the instalment is deducted every month and is reflected in this section of the salary slip.
A salary slip is an important document which must be provided to employees, on the same day as the salary transfer. Some companies may not provide recurring payslips in which case you must ask for a salary certificate.
