Salary Slip |Components & Importance

Salary Slip Format

Salary Slip |Components & Importance

Salary Slip Decoded | Know All About Your Salary Slip

Introduction

Salary slip is the most valid proof of employment of an employee. It gives an overview of the salary structure and taxes paid by you on a monthly basis. this article, we are decoding salary slip, its componenets, importance and its format. Understanding the pay slip will help you in effective money management.

Salary Slip Decoded|Components & Importance

What is Salary Slip or Pay Slip?

  • Salaries are paid by organizations to their employees in exchange for the services rendered by them.
  • Salary Slip : Every employee is entitled to receive a salary slip from his/her employer. This is a legal document which acts as proof of your employment. It gives an overview of the salary structure and taxes paid by you on a monthly basis.
  • CTC vs Gross Salary :
    • CTC (Cost to Company) refers to the total amount an employer will spend on an employee, in a given year. Whereas, gross salary is the amount an employee receives as a salary, before any deductions.
    • Cost to Company involves salary, reimbursements, contributions and tax benefits. On the other hand, gross salary is the amount an employer has committed to pay an employee, monthly. It does not include the contributions to the PF and gratuity, among other things.
    • Your gross salary includes components like basic salary, dearness allowance, medical allowance, conveyance allowance, house rent allowance (HRA), city compensatory allowance, deductions, and other emoluments etc.

Structure and Components of Salary Slip

We understand that it is complicated to figure out the salary slip as an employee it contains a lot of information. Further, the format of salary slip is different for different employers. So lets see the structure and components of salary slip in detail.

2 Main components of Salary slip are : Income and Deductions

Income / Earnings

1. Basic Salary
  • 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 the other components mentioned on the salary slips are based on your basic salary. They are calculated as determined % of Basic salary.
  • Tax Implications : 100% taxable
  • Adds to in-hand? : Yes
2. Dearness Allowance
  • The major objective of this allowance is to sublime the effect of inflation on the employee. This allowance is directly related to the employee’s cost of living and differs from employee to employee.
  • Tax Implications : 100% taxable
  • Adds to in-hand? : Yes
3. House Rent Allowance (HRA)
  • HRA allowance is paid to help the employees in paying their rent. The allowance percentage depends on the location.
  • For metro areas, the HRA allowance is 50% and for other regions, it is 40%.
  • Tax Implications :
    • 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:
      1. Rent paid annually (-) 10% of basic salary
      2. Actual HRA component specified on salary slip
      3. 50% of (basic salary) in case the location is (Mumbai, Kolkata, Chennai, Delhi) or 40% of (basic salary) in case of other cities.
  • Adds to in-hand? : Yes
4. Conveyance Allowance
  • This is given to the employees to reduce their commuting cost between home and office. It’s paid on the monthly basis. Sometimes, it is added in your cash in hand amount but it mostly depends on how much you spend on the transportation and if you have receipts to prove it.
  • Tax Implications : Rs.1600 per month or the conveyance allowance component in your salary slip, whichever is lower, is exempted from tax.
  • Adds to in-hand? : Yes, depending on how much you actually spend
5. Leave Travel Allowance (LTA)
  • This allowance covers the travel cost for the employee and their immediate family while they are on leave. However, this facility is offered only once in two years and does not include your accommodation and food. You need to provide your employer with valid documents proving your travel.
  • Tax Implications : Proof of journey required to avail deduction subject to certain limits. Any expenses incurred during the trip apart from travel does not count towards your LTA tax exemption. The exemption is also applicable only for 2 journeys undertaken in a block of 4 calendar years.
  • Adds to in-hand? No.
Income Tax Knowledge Bank by Invest Yadnya
Income Tax Knowledge Bank by Invest Yadnya
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 upto 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 standard deduction for all salaried employees have been introduced. 
    • Standard deduction is allowed at Rs.40,000 for all employees irrespective of actual amount spent.
    • Interim Budget 2019 increased the limit of standard deduction to Rs.50,000.
7. Performance Bonus and Special Allowance
  • It is given to reward or encourage employee performance and varies with performance or company guidelines.
  • Tax Implications : 100% taxable
  • Adds to in-hand : Yes. It can be variable and therefore, difficult to assess as part of your in-hand.
8. Other Allowances
  • These allowances vary from company to company. These could be paid by the employer for any reason and such types of allowances are clubbed under ‘Other allowances’. 
  • Tax Implications : 100%
  • Adds to in-hand? : Varies

Deductions

1.Provident Fund

  • At least, 12% of the employee’s salary goes to the Provident Fund which is the accumulation of funds for employee’s retirement period. This amount does not fall in the tax bracket and earns interest on the contributions made by the employee and the employer.
  • How to lower this deduction : You can choose to opt out of the PF scheme. In case you opt out, make sure you invest it regularly in better investment options like equity mutual funds that gives you a higher return. If you are unsure of investing the money, it’s best to stay invested in PF.
2.Professional Tax
  • It is a state levied tax and is applicable only in a few states: Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Assam, Gujarat, Chattisgarh, Meghalaya, Kerala, Orissa, Tripura, Jharkhand, Bihar and Madhya Pradesh.
  • It is calculated on the basis of employee’s tax bracket and this amount is deducted from your taxable income.
  • How to lower this deduction : This deduction cannot be lowered.
3.Tax Deducted at Source (TDS)
  • You get your salary after your employer has deducted TDS on behalf of the Income Tax Department.
  • How to lower this deduction : You can invest in tax saving schemes under Section 80 C and furnish the documents to your employer so that they can revise the tax payable.

Salary Slip Format

Salary Slip Format
Salary Slip Format

Importance and Benefits of Salary Slip

  1. Income Tax Payable : Your salary slips determine the amount that needs to be paid as income tax and the claims that you can file for income tax returns.
  2. Figuring your Retirement Savings : Using salary slip you can exactly find out the employee and employer contribution for PF. Figuring your Retirement Savings :
  3. 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.
  4. 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.
  5. 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.
  6. Government subsidies : Salary slips also entitle you to benefit from government subsidies in medical care or in the public distribution system of food.

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