Understanding your salary slip!

The first thing after joining an organization, we all are excited about is our salary. But most of us do not understand why we got less than the CTC/12, why is my basic salary so less, which tax slab do I fall in? And many more such questions. For me, it really took some time to understand the “Contents” in my salary slip. I have tried keeping this explanation generic to the must components in the salary slip.

The “number ” that is present on your Offer Letter is the CTC. i.e the Cost to Company. It never happens that you get CTC/12 “in-hand”. CTC is the amount of money that it is spending on you directly or indirectly. CTC has various components other than taxes that most of us are unaware about initially viz PF, Gratuity, Basic Salary, lunch or snacks charges, etc according to the company.

Employer Contribution to EPF + Gratuity + Gross = CTC [ In few companies variable pay/Bonus/Performance Incentive is also added ]

Gross salary signifies the amount paid out to an individual before any voluntary or mandatory deductions are made from it. Therefore, it is the total pay that an employee receives before taxes and other deductions. Gross salary includes income from all sources and is not confined to only the income received in cash. Therefore, it also includes benefits or services received by an employee. On the other hand, the salary that an employee takes home is the net salary after all the deductions.

Gross Salary = Basic Pay + Allowance [ HRA, LTA etc..] + Employees contribution to EPF
Net Pay [ Take home ] = Gross - Income tax and other deduction like professional tax

I had felt very disappointed when I saw the basic salary on my payslip. But eventually, I understood, the less the basic salary the more tax-saving options you have. So, the basic salary is generally 30–40% of the gross salary and is “100% taxable”, which means you cannot use any tax saving options to save it. As per the new wage bill, this will be changed by the Govt of India, and basic pay will be 50% once the law is implemented.

The next one is the “HRA (House Rent Allowance)”. If you are a salaried employee, the government of India states that the money that you are paying as rent, can be claimed as income and you can get tax benefits on it. There are three ways of calculating the HRA and is minimum amongst the three value obtained from:

10% of basic OR 50% of basic if you live in a metropolitan city or 40% of basic in a non-metropolitan city.

At the start of the financial year, you need to declare the amount per month you are going to pay as rent and at the end of the financial year, you need to submit the proof consisting of the rental agreement or the receipt from the landlord signed statement that you have paid the rent for the claimed period.

The next one is the Medical allowance. This allowance is mostly fixed at Rs. 1,250 per month (Rs. 15,000 per year) — the maximum amount which you can claim as reimbursement if you submit bills incurred on medical expenses for self or dependents. If no bills are submitted, the entire amount is added to your taxable income.

Deductions:

The three types of deductions in a salary slip are

Professional Tax:
Professional tax is a small tax levied by state governments on earning professionals. It is payable only in a few states. Namely, Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamilnadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura, Jharkhand, Bihar, and Madhya Pradesh. This amount is deducted from the taxable income. Also, it usually amounts to just a few hundred rupees each month

Income Tax:
It is the amount deducted by the employer on behalf of the income tax department. It is based on the gross tax slab of the employee. One can reduce this amount by investing in tax-exempt investments like equity funds (ELSS), PPF, NPS, and tax-saving FDs. It appears on the deductions side of the salary slip. Hence, investing in section 80C instruments of the Income Tax Act increases your take-home salary. One can invest in mutual funds (ELSS), submit investment proof to the company, and claim TDS returns. You can find your tax slabs here.

Employee Provident Fund
A provident fund is a compulsory, government-managed retirement savings scheme used in Singapore, India, and other developing countries. Workers give a portion of their salaries to the provident fund and employers must contribute on behalf of their employees. The money in the fund is then held and managed by the government and eventually withdrawn by retirees or, in certain countries, their surviving families. In some cases, the fund also pays out to the disabled who cannot work. Also, the fund pays to the folks that are going to pursue higher education.

There can be some variations in the structure company-wise. But I tried explaining the most generic terms in an easy way.