You got a job! Congratulations! One of your first orders of business is to know that as a salaried employee, you are entitled to receive a very important document called the salary slip or payslip. It has many elements to it around allowances and taxes which can be quite confusing and which we will help interpret for you in this blog.
What is a Payslip?
Your company is liable to issue you a payslip with Company details such as their logo, address etc. at a certain cadence which could be either bi-weekly or monthly and in a digital format or as a hard copy version. Besides sufficing as proof of your employment, a payslip details your basic salary and the many allowances you are entitled to along with information on any taxes deducted for that duration of pay.
Format of a payslip:
The format of a payslip is specific to each company and depends on the HRMS systems they use for salary processing. However, the basic template for a payslip includes the following:
- Company information such as the Company name, logo, address, and payslip duration.
- Employee information such as the Employee name, Employee ID, department, designation and location.
- Employee PAN/Aadhaar and bank account numbers
- EPF and UAN account numbers
- Earnings or Income statement
- Net pay
- Total Workdays including accounting for effective workdays, number of leaves taken, etc.
Your gross salary is your earnings before any deductions are applied. However, gratuity and EPF are deducted from this income.
Cost to Company (CTC) is the overall spend a company makes to hire or onboard an employee, which includes several types of allowances which will be explained shortly. The bottom line though is that it affects your net salary which is your take-home salary and the amount you receive after all deductions and taxes are taken into account. Your net salary will always be lower than your CTC.
A payslip sample is shown below. Let us walk through the different components to understand them in greater detail.
Earnings or Income statement components:
This is probably the most important component of your salary and could comprise up to 50% of your total pay. It also serves as a baseline to determine the other elements of your salary. Early in your career, your base could be quite high but it tends to get lower as you rise through the ranks so that it remains lower than your overall compensation. Hence it is prudent to negotiate a higher base pay prior to accepting your job offer.
Dearness allowance (DA):
DA, which is typically applied to public sector employees, is calculated as a specific percentage of your base pay and is given to offset the impact of inflation. It is taxable and needs to be declared when you file your Income Tax Returns. It could vary by location since the amount is based on your cost of living.
House rent allowance (HRA):
HRA, is an allowance employers pay to employees who live on rented premises. It depends on the location of employment. In Metro cities such as Mumbai, Delhi, Chennai or Kolkata for example, HRA could be 50% of your base pay and it could be as low as 40% for other cities. You can claim a portion of the HRA as a tax deduction, provided you live in a rented house, per Section 10 of the Income Tax Act, 1961.
Conveyance Allowance (CA):
CA, is the amount employers could pay employees to commute to work. From a tax exemption standpoint, at present no yearly exemption is allowed. Instead, a standard deduction of ₹50,000 is available.
Medical Allowance (MA):
MA, is the allowance companies pay to employees during their employment to cover any medical expenses incurred which can also be claimed under the standard deduction.
Special Allowance (SA):
Companies could give a special allowance to encourage better performance for example and is completely taxable.
While not shown in the example here, employers could also provide Leave Travel Allowance (LTA) to cover travel expenses for personal or family holiday time and could cover flight or rail costs for travel within India. Proof of travel would be required, and you could claim a tax exemption for up to two holidays in a four-year duration.
Some state governments charge this tax on all earning professionals including salaried employees and traders who declare an income and is calculated based on each individual’s tax bracket.
Tax deducted at source (TDS):
TDS is the tax deducted from your income on behalf of the Income Tax Department. You can take advantage of some tax saving options that you could choose to invest in such as Equity funds (ELSS), PPF, NPS and Tax-saving FDs, to reduce the TDS. Documentation for the same would need to be provided to your employer.
Employee Provident Fund:
Employers make a deduction of at least 12% of your base towards an EPF account as an investment avenue for creating a retirement fund for employees. Employers match the amount. The employee contribution towards EPF allows for a yearly tax exemption of EPF contributions per Section 80C of the Income Tax Act.
A point to note is that the standard deduction was reintroduced in the Union Budget 2018-19, which allowed from FY2019-20, for a sum of ₹50,000 to be claimed as a standard deduction by salaried employees, and has since replaced the transport allowance (₹19,200 pa) and medical reimbursement (₹15,000 pa) components of the payslip.
In conclusion, a payslip is incredibly important and needs to be understood and preserved for several reasons:
Proof of employment:
A payslip serves as a legal confirmation of your employment and will be required for travel visa applications; proof of salary claims and other background checks for example.
Income Tax Planning:
Your payslip helps with tax planning since your salary is made up of various elements such as your base pay among other allowances which have different tax implications. It will also allow you to assess if you are eligible for any concessions per the Income Tax Act, 1961 and can help you maximize your monthly tax savings for the fiscal year.
To avail loans, subsidies:
Your payslip provides insight into your monthly earnings, which can help determine your ability to meet your debt obligations. Lenders and Credit Card companies will require you to furnish a copy of your pay while applying for credit card, loan, mortgage etc. You can also use it to avail government subsidies on medical services, food etc.
As you look to transition into another company/opportunity, knowing the different components of your payslip can help you negotiate a higher salary and better compensation.
This blog is written by Beehive, a leading HRMS Software company headquartered in Mumbai. We would like to acknowledge some of our peers for the learnings we get from them to be able to assimilate and edit a blog of our own.