Know Your Salary Slip

Salary slip is one of the vital documents of employment. It gives you an overview of your salary structure and taxes paid by you on a monthly basis. The fact is many of us still don't understand the basic structure and terms of the salary Slip. Understanding a salary slip can help you manage and plan your money in a better way. In this article, we break down and discuss the components of the salary slip and its importance as well.

Before dig deep and decode the salary slip lets understand the two very basic terms and importance of the salary Slip: 

a. Cost To Company (CTC): It is the cost that the employer spends on the employee during a particular year. It Includes Salary, reimbursement, contribution, performance bonuses and taxes.

b. Gross Salary: It is the amount the employee receives as a salary, before any deductions. It is the amount the employer has committed to pay to the employee. It includes components like basic salary, dearness allowance, medical allowance, conveyance allowance, house rent allowance (HRA), city compensatory allowance, deductions, and other emoluments, etc.

Importance and Benefits of Salary Slip

a. Income Tax Payable: Your salary slips determines the amount that needs to be paid as income tax and the claims that you can file for income tax returns.

b. Figuring your Retirement Savings: Using salary slip you can exactly find out the employee and employer contribution for PF. Figuring your Retirement Savings 

c. Loans and Credit Cards: If you are applying for a loan or credit card, the bank will ask for your payslips and verify if you are eligible for the loan amount you have applied for.

d. Visa Application: In some cases, while applying for visas or for universities, you might have to furnish your salary slips are they are legal proof of your employment and position held.

f. Increment Proof: Your salary slips also play an important role in determining your future salary.. For example – If you are changing your job, then your new employer will ask for your salary slips. Your pay will be determined on your salary slips.

g. Government subsidies: Salary slips also entitle you to benefit from government subsidies in medical care or in the public distribution system of food.

Salary Slip Structure

The salary slip has two major bifurcations i.e. Income/Earnings and Deductions. Let's get these right one by one.

Income/ Earnings

1. Basic Pay: 

Basic salary comprises approximately 40%-50% of your total salary and is the most important component. The percentage of the basic salary varies from company to company. All other components mentioned on the salary slip are calculated as a predetermined percentage of your basic salary. It is fully taxable ad forms part of the in-hand salary.

2. Dearness Allowance (DA): 

The Dearness Allowance is a cost of living adjustment allowance paid to the employees. It is calculated as a percentage of basic salary to mitigate the impact of inflation on people. Like basic pay, it is also full taxable and forms part of the in-hand salary.

3. House Rent Allowance (HRA):

House Rent Allowance or HRA is a part of the salary provided by an employer to his employee for his rented accommodation. The allowance percentage depends on the location. HRA exemption can be claimed only if the employee is residing in a rented house. It comes under Section 10 and the exemption from tax can be claimed partially or fully. HRA is a useful allocation of your salary component to save tax

This allowance is also taxable but qualifies for tax exemptions under certain circumstances like you should actually be paying the rent and should possess supporting documents like lease agreement/ rent receipts/ PAN of the owner.

HRA is exempted from income tax up to a certain limit, provided you pay rent. The exemption amount is calculated as the minimum of:
i)   Rent paid annually (-) 10% of basic salary
ii)  Actual HRA component specified on salary slip

iii) 50% of (basic salary) in case the location is (Mumbai, Kolkata, Chennai, Delhi) or 40% of (basic salary) in case of other cities.

4. Conveyance Allowance: 

Conveyance allowance also referred to as Transport Allowance, is a type of allowance offered by a company or employer to the employees to compensate for their travel from their place of residence to the workplace. Conveyance allowance is only paid by the company if it does not have a transportation service available to the employees. If the company offers transportation services, it does not pay conveyance allowance to employees whether the employees avail the service or not

5. Leave travel Allowance: 

Leave Travel Allowance is paid by an employer to the employee when the latter travels with their family or alone within the country. An employee can avail the exemption only twice in four years. It is one of the best tax-saving tools based on Section 10 (5) of the Income Tax Act, 1961 with Rule 2B. LTA does not include food, shopping or other expenses incurred during the trip. It is not mandatory to submit documentary proof of travel but the assessing officers can demand it during the assessment.

6. Medical Allowance:

It is given by employers to cover any medical expenses incurred during the period of employment. It is also generally a reimbursed expense and thus subject to providing proof of expense.

Budget 2018 discontinued the tax benefit of maximum up to Rs.15,000 in respect of medical allowance and transport allowance. But, to the relief of tax filers a new deduction in the name of the standard deduction for all salaried employees have been introduced.
The standard deduction is allowed at Rs.40,000 for all employees irrespective of the actual amount spent. Interim Budget 2019 increased the limit of the standard deduction to Rs.50,000.

7. Performance bonus : 

It is a reward given to encourage employee's performance and varies as per the performances and employer's guidelines. These are fully taxable as there are given as pure prerequisites. These are variable in nature, hence not feasible to include in the in-hand salary.

Deductions 

1. Provident Fund: 

The EPF scheme basically aims at promoting savings to be used post-retirement by various employees all over the country. Employees’ Provident Fund or EPF is a collection of funds contributed by the employer and his employee regularly on a monthly basis. The employer and employee contribute 12% each of the employee’s salary (basic + dearness allowance) to the EPF. These contributions earn a fixed level of interest set by the EPFO. The amount of interest to be received on the deposit along with the total accumulated amount is totally tax-free, i.e. the employee may withdraw the entire fund without worrying about paying any kind of tax on it

2. Professional Tax: 

Professional tax can be defined as a tax that is levied by a state government on all individuals who earn a living through any medium. This must not be confused with the definition of other professionals such as doctors or lawyers. This is a type of tax that needs to be paid by each and every individual earning income. The calculation of this tax and the amount collected differs from one state to another. However, the limit has been set to Rs. 2500 per year.

3. Tax Deducted at Source (TDS):

As per income tax act any person, making a payment is required to deduct tax at source if the payment exceeds the certain threshold limit at the prescribed rates. You get your salary after your employer has deducted TDS on behalf of the Income Tax Department. You can invest in tax saving schemes under Section 80 C or other tax savings provision and furnish the documents to your employer so that they can revise the tax payable.