Every employer is legally required to send employees a salary slip that offers details of their salary breakdown and deductions. Most employers adhere to this legal necessity and in all likelihood, you receive a salary slip – either on email, on the company’s ERP or as a hard copy – along with your salary every month.
Let’s have a look at some of the most common terms that appear on a salary slip format, along with what they denote. We will also delve into what some of these titles imply for you like a salaried individual and taxpayer, and what their implications are when you are applying for a loan or a credit card.
Cost to Company, abbreviated as CTC, is the total amount that your employer spends on an employee individually. However, this is not what you will receive in your bank account. Some of this amount is lost to taxation; some of it goes into ensuring long-term savings, and so on. This amount is more relevant to your employer than to you.
Your CTC is often used as a bargaining chip during negotiations with prospective employers and in some cases, people might use their CTC to claim bragging rights.
This is far more relevant to you and is the taxable component of your salary. This amount is taken into consideration by the income tax department in deciding whether you fall into the tax bracket, and which tax slab you fall under.
However, you should know this is not all you stand to receive in your bank account on a monthly basis. In fact most companies try to reduce their employees’ tax liability by keeping the basic salary low and including non-taxable allowances or other components that can enable a lighter tax burden.
Typically abbreviated as HRA, this component of your salary is non-taxable up to a certain amount, but only if you are actually paying rent. If you live in any of India’s metros, you will receive 50% of your salary as HRA and if you live in a non-metro, you receive 40% of your salary as HRA. Only Mumbai, Delhi, Kolkata and Chennai are recognised as metros by the income tax department – do keep this in mind when making estimates of the amount that you will receive.
Let’s have a look at how much of your HRA is taxable. Tax will be calculated on whichever is the lowest of the following amounts:
This amount is non-taxable (up to a certain limit) and is given to you for your travel to and from work. Depending on how you commute, you might spend much less or much more than the tax-exempt amount, which is Rs 1600, but the amount is fixed by the government.
You do not need to provide any proof to claim conveyance allowance and to avoid tax on the amount.
Especially if you have high medical expenses (and this includes your dependents like aged parents and children), claiming your medical allowance against actual medical bills is a great way to save tax. The ceiling for this is Rs 15,000 per year. Don’t have medical expenses or medical bills? You will still receive this component of your salary, but you pay tax according to your tax slab.
Until now, we were looking at inclusions – all the above amounts are in addition to your basic salary and the sum of these amounts is known as your gross salary. Your gross salary is what is observed by lenders when deciding whether to extend credit to you, and the volume of credit to be extended. In some companies, you might also get a dearness allowance (that helps you cope with inflation) or other special allowances that might be performance linked, as part of your gross salary.
Listed below are some deductions which can be found in a general format of salary slip. These components are a part of your CTC.
Most people will tell you that professional tax is always Rs 200 and indeed it is very often charged at Rs 200. In actuality, the amount can vary as per your income and the state or union territory you reside in. A maximum amount of Rs 2,500 is payable as professional tax.
Here are some examples:
However, there are many states where a professional tax is not levied. These states include:
The amount mentioned on your salary slip goes out of your salary and is invested in a government savings scheme known as Employee Provident Fund and abbreviated as EPF. Your employer also puts in a similar amount (and it is included in your CTC).
The EPF contribution is meant to safeguard your retirement. Therefore, you can withdraw the funds from your EPF account only after retirement age. However, partial withdrawals are allowed in special cases like children’s education, children’s marriage, medical emergency, house purchase, etc.
Your employer pays TDS (Tax Deducted at Source) to the government. You can reduce this amount and get a higher amount in your bank account by supplying your accounts department with any tax-saving investments as listed under 80C of the income tax act. Tax-saving fixed deposits, ELSS (equity-linked savings scheme) mutual funds, EPF (employee provident fund) and PPF (public provident fund) are some examples of investments that can reduce your tax liability. Section 80C of the income tax act allows you to get an exemption of up to Rs 150,000 on your taxable income.
It is good practice to understand your salary slip and plan your investments and proof-linked claims accordingly so as to minimise tax outgo. It also helps you negotiate better and to plan your spending and develop attainable savings goals. Do not simply assume that you will receive the entire CTC in your bank account.