Few days back while I was having a treat from Rohan (my friend’s younger brother) for getting a new job with 50% raise in his income, I did not expect him one month later to be asking me about legal resolution of not getting the salary as committed. Where he was expecting his income to increase by 50%, he got only 5% rise in the take home salary. The reason was the perks which are part of CTC (Cost to Company), where the rest 45% of hike is lying. Had this ever happen to you, that your appointment letter tells you something and your salary slip something else? I have seen people working for so long don’t pay heed to salary slip components. What they like to see is the gross amount and the net amount they get.
Importance of understanding Salary Slip components
Understanding of salary slip components is very much important for an employee because this break up of salary will decide the taxability of one’s income and also the retirement benefits (Read : all about gratuity). Besides this many times companies provide flexibility to employee to get the salary components restructured as per his cash flow, financial goals and taxability status. There’s one more reason to it. As tax laws keeps on changing, so one should be aware about applicability of the same on one’s salary. I have practically seen a company employing hundreds of employees making mistake in calculating TDS on salary. Now if employee himself is aware of the laws then one can easily pinpoint the flaws and saves himself from paying anything extra.
Usually a salary slip contains the following details:
- Employer name and Address
- Employee number, department of working, designation, date of joining,.
- Employee bank details where salary gets credited.
- PF and ESI account number and other details
- No. of leaves taken in particular month
- Salary break up like basic, allowances. Incentives etc.
- Tax computation and TDS details
In this article I’ll specifically talk about component number 6 above. But before that let’s have a look at the broader subject from where the actual confusion starts i.e. Cost to Company (CTC).
What is Cost to Company (CTC)?
CTC is the total cost which a company incurs in using your services. Besides your take home salary, it also includes employer contribution in your PF, any group insurance premium, your annual performance incentive payment (which you may not get 100%), Some other benefits you are entitled to like low interest loans, Car lease amount and other costs related to your employment (which you may take for granted).
Important components of salary slip are as follows:
1. Basic Salary: This is the most important part of a salary slip as many of the other components are structured around it. In many cases the value of the basic salary is taken to calculate the taxability of others. The basic salary is 100% taxable.
2. House rent allowance: As the name suggests House rent allowance is given to the employee to take care of the house rent if he is living in rented accommodation. HRA is calculated as a percentage of Basic salary. Generally, it is 40-50% of the basic salary. Even calculating the taxable portion of HRA basic plays a very important role. The minimum value out of the below 3 is the tax-free amount of HRA.
a) 40% of Basic (or 50% in case of metro cities)
b) Actual Rent Paid minus 10% of basic
c) Actual HRA
3. Medical allowance: Employer can give any amount as a medical allowance (not more than Basic), but out of it only Rs 1250/- per month or Rs 15000/- per annum is tax-free and that too only after submitting medical bills of the same amount.
4. Conveyance/Transport Allowance: This allowance is meant to support the expenses employee incurred in travelling to and fro from office. Here again, there’s no limit on payment but only Rs 800/- per month is tax-free. In this case, there’s no need to produce any bills.
5. Leave Travel Allowance: This allowance is paid to the employee to Travel during the leave period. It covers only travel expenses and not lodging, boarding, or food. You can travel alone or with family and the exemption can be claimed for 2 journeys in the block of 4 calendar years. Whatever extra left after adjusting the above-mentioned expenses is taxable.
6. Special allowance: Whatever the balance left to be paid to the employee after the above allowances, gets paid under this allowance. Special allowance is 100% taxable.
There are some more allowances which are referred in income tax act like education allowance, entertainment allowance etc. but normally the allowances mentioned above are part of maximum salary slips.
Deductions in Salary Slip:
The above-mentioned details and allowances collectively form your in-hand Gross salary but there are few deductions that have to be made in this gross amount before you get the net salary in your bank account. Below are some of the deductions:
1. Provident fund: 12 % of your basic salary gets deducted every month and deposited in your PF account. The same amount is contributed by your employer as mandated under the law. But here’s one catch- There are many companies that deduct and deposit PF @12% on Rs 6500/- only as the minimum amount specified under the law and thus there’s no condition of 12% on complete basic. One may request the employer to deduct his personal PF on complete basic but it is not compulsory on the part of the employer to deposit the equal amount. Whatever employer deposit is shown in your CTC.
This is one of the major points in Rohan’s case. His previous employer was deducting PF on Rs 6500/- only and his current employer on the complete basic. What he did not acknowledge was that employer is also contributing the same amount.
2. Income tax deduction: At the start of a financial year your employer asks for a declaration of savings which you will do in the current year and calculates the tentative tax for that financial year accordingly. You will see your employer deducting TDS on your salary every month based on that calculation. Your salary slip shows that amount.
A salary slip is an important record of your salary disbursement. Even from setting up of transparent compliance regime, every employer provides salary slips to its employees. It’s better you should have a look at your salary slip at the start of the financial year and make arrangements for your tax saving and also family budget of expenses and saving towards a goal. Understanding the CTC and salary break up is very important before you accept any new job. You should be having a clear idea on what benefits you will get or are eligible for and thus make the most out of it by using it judiciously. If you don’t find the use of any of the benefits you may request your employer to adjust as per the flexible pay option plan without any compulsion on the latter.
If you have any query on your salary slip, do ask in the comments section below.