Every month, we hear the much-awaited beep from our bank on our phones and sigh. You are lying if you say that you didn't feel like doing a little dance when you received it for the first time, and you have grown accustomed to greeting it like an old friend on the 30th or 1st of every month, depending on your company policy.
But we fail to realise is that it doesn't end with our salary account being credited. It is important to pay attention to the email sent by the finance department with the salary slip.
Understanding the salary slip is fairly simple if you really try, and it is very important to do so because not only can it help you to optimise your tax savings, but also understand the gap between your CTC and the in-hand salary you receive every month. Chances are, if you're smart enough, you can save a considerable amount by tweaking your finances if you understand your salary slip well enough.
There are 3 main components in your salary slip:
- Basic pay.
- Allowances: They include your HRA, medical allowance and other allowances.
- Deductions: They contain Professional Tax, TDS and Employee Provident Fund.
We are going to deal with each section separately, and define each concept.
Quick Tip: Make sure that your offer letter contains the company stamp and signatures, along with your salary slip. There should not be any ambiguity in this respect.
Basic Pay
This is the most important part of your salary as all other components (allowances and deductions) are structured around it. It is usually between 35-50% of your CTC. Your basic salary is 100% taxable. If you have a higher basic salary, you need to be prepared to pay tax on it.
Allowances
There are some allowances which the company gives you, and they usually differ from company to company. However, these are a few common allowances which every company gives. Try to understand them by talking to your HR and ask the tax liability on them.
House Rent Allowance:
HRA is usually around 50% of your basic salary, and it will change depending on whether you live in a metro or non-metro. You need to provide original rent receipts, copy of duly executed lease agreement between employee and property owner, and the Permanent Account Number of the property owner in order to get the tax benefit. 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
Conveyance Allowance:
It’s paid by the company towards the cost of travel from home to work and back and is exempt from Income tax. You don't need to submit any bills for the same. You get Rs 1600 tax-free for travel every month.
Leave Travel Allowance:
You get an allowance for any travelling done during leave period, and you can also get covered for their immediate family members. However, it covers only travel expenses, and not lodging and food or other expenses. The leftover amount after covering above expenses is taxable. You can claim this only twice in a period of 4 calendar years.
Medical Allowance:
You get a medical allowance up to Rs 15,000 per annum. The amount may be increased, but it will be tax-free only up to Rs 15,000. However, you need to submit all the medical bills otherwise you may receive the amount but you will be taxed fully on it.
Performance Bonus and Special Allowance:
Performance bonus depends on your performance at work, and it is given annually or twice a year, depending on your company policy. It is taxable. Special allowance is given over and above your basic salary, and this is also taxable.
Deductions
The above factors add up to your gross salary, however, some deductions are applicable before you can bring home the bacon. Usually, there will be three deductions:
Employee Provident Fund:
12% of your basic salary goes into a government-controlled body, Employees' Provident Fund Organisation, and it is matched by the company as well, subject to company policy. You can choose to opt out of your PF, but it will be foolish to do so unless you invest this money at better places like equity mutual funds. It is usually advisable to go ahead with the PF deductions because you do earn interest on it. Here's a catch: some companies may deduct and apply the 12% PF only on Rs 6500/- which is the minimum as defined by law, as opposed to the basic salary.
Tax Deducted at Source:
It is based on your tax slab and the documents you submit proving tax-saving investments, and is deducted by your employer on behalf of the Income Tax Department. It is advisable to reduce this liability by investing in tax-saving instruments.
Professional Tax:
This tax is payable only in certain states - Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura, Jharkhand, Bihar, and Madhya Pradesh. People residing in other states don't need to pay this tax. It usually amounts to only a few hundred rupees each month and it is deducted from your taxable income.
Being smart is the need of the hour, and while these terms might get overwhelming if this is the first time you are coming across them, you should be very clear about every aspect of your pay slip.
It will also come in handy when you want to compare your current salary with an offer from another company in future, and allow you to make an informed decision.
Note: The part 2 of this article will contain comparision of different salary slips and illustrations of how you can optimize your tax benefits, and will be uploaded soon.