- Date : 05/06/2021
- Read: 4 mins
Do you get confused between the different heads on your salary slip? Here’s what they mean.
Most of us study hard in school and college so that we are assured of landing a high-paying job. Income is one of the most significant parameters to gauge success. However, not many people truly understand the components of a salary slip.
Your take home salary may be different from what is mentioned in your offer letter. This is because the gross and net salary are not the same. Besides, unless you know how to read your salary slip, you will not be able to negotiate a better remuneration for yourself.
Read on to find out how you can understand the exact breakup of your salary:
Demystifying the salary slip
To be conversant with the salary structure, you must know about the following heads:
Cost to Company (CTC): This is the total amount that a company spends on an employee. The CTC is a combination of the gross pay, provident fund, and any other allowance that you may qualify for.
Basic salary: The basic salary is the fixed portion of your total salary that the company pays you every month. This does not include any allowances or benefits.
Gross salary: This is the total of your basic salary and allowances, minus taxes and other deductions. Gross salary includes overtime pay, holiday pay, etc.
Allowances: Allowances are additional benefits that you receive over and above your basic salary. These have been explained below:
DA: Dearness allowance is given to public sector and government employees (and also pensioners) to beat inflation.
LTA: Leave travel allowance is given to cover the costs of domestic travel of an employee.
Transport allowance: Transport allowance covers the expenses of the employee’s day-to-day commute from home to office.
HRA: Employees can use the house rent allowance or HRA to pay rent and cover the expenses of rented accommodation. HRA is also a tax-saving tool. However, you need to produce rent receipts to claim it.
These allowances depend on your basic salary and can vary for different employees. You could ask the finance team of your company to find out how is travel allowance, LTA, DA, and HRA calculated.
Bonus: A bonus is usually given at the end of the financial year as a reward for your good work. This can depend on your overall performance in the previous year and is given over and above your basic salary.
Employees’ provident fund (EPF): This is a retirement investment scheme that your employer may offer along with your salary. Generally, employers cut 12% of your basic salary as your provident fund savings contribution every month. The employer also contributes the same amount. The fund matures at retirement. The rate of interest for EPF in FY 2020-2021 is 8.5%.
Insurance: You may see a separate head for insurance on your salary slip if your company offers life or health insurance. In such a case, the value of the insurance premium will be added to your CTC and the premiums will be deducted from your monthly salary.
Gratuity: Gratuity is paid to an employee at the time of quitting the company after five years. The gratuity amount is a part of the CTC and deducted by your employer every year.
Tax: The employer cuts taxes, such as income tax and professional tax, from your salary. This is also known as tax deducted at source (TDS). Though companies cut tax at source, you can file an income tax return for a tax refund if you qualify for any tax exemptions.
How to calculate your take home salary
Now that you know the components of your salary slip, here’s how you can calculate your take home pay.
Calculate the gross salary: Take your CTC and subtract PF account contributions and gratuity from it.
Calculate taxable income: Take your gross salary and subtract all deductions like HRA, LTA, etc.
Check your tax slab: Once you have your taxable income, you can check the percentage of income tax charged on it as per the tax slab you fall into. There are two tax regimes in India currently – old and new. Check both and choose one as per your preference.
The remaining portion of your income after paying tax will be your take home salary. Cannot decide the best way to spend your first salary? Here are some tips