A guide to everything you need to know about your salary slip - what it is, what are its components and much more.
Got your first salary slip? Or you get it every month but can’t figure it out? Don’t fret, you are definitely not alone.
The puzzling language and statistics are analogous to a problem that no one wants to solve. But, before going forward we want you to know that Developing savings as a habit is now easy & awarding.
It messes up your head, especially when you’re applying for a loan, applying to a new company, or taking a credit card.
Many employees struggle with the same problem. And we, at Jar are here to break it all down for you!
Let’s start with the basics. What is a Salary Slip?
A salary slip, also called an employee payslip, is a monthly legal document issued by an employer to its employees.
It contains a thorough breakdown of the employee’s salary which includes all the inclusions, exclusions, deductions, etc for a specific time period.
Mostly all salaried employees get a salary slip. They might receive a tangible copy of this document or it can be mailed to them in a PDF format which they can view or print if they want.
But why is this Salary Slip so important?
Do you know companies are legally bound to issue you your salary slip with a detailed breakdown? So clearly these payslips hold some real importance. Here’s why:
- Proof of employment: Yes, this document acts as proof of employment in the eyes of the law. If you’re applying for a visa or executive program at various colleges, they might even ask you to produce copies of your payslip as proof of your latest drawn salary and designation.
- Income Tax Planning: Your salary is made up of numerous components - basic income, the HRA, the transportation allowance, the medical allowance, the leave travel allowance, and so on. And they are all taxed differently. So knowing how to read a salary slip and understand its components is only beneficial. It can really help you in taking advantage of possible tax deductions and you’ll be able to plan your taxes effectively.
- To get a loan or a credit card: Banks ask for your salary pay slip (because it contains all information about your monthly income) as a vital component in determining your ability to pay back your debts. Hence, your salary slip, again, is a crucial document when applying for a credit card, loan, mortgage, or other types of loan.
- For finding a new job: When switching jobs, a salary slip can help you choose positions wisely from several companies. It also functions as a negotiator for a raise in pay when switching jobs. In fact, many companies even ask you to attach your previous salary slip during the onboarding process.
- For a better understanding: Your salary slip contains components that are compulsory savings in a way. Like, EPF and ESI. You can choose to opt-out of some of these mandatory savings and put your money into high-yielding investments. Hence, understanding the salary slip and its components might assist you in taking advantage of the positions you find yourself in.
Now comes the most commonly asked, yet the most confusing component for many people. CTC and In-hand salary.
What is the difference between CTC and in-hand/gross salary?
The total amount paid by the company to an employee is referred to as the Cost to the Company (CTC).
It includes everything - Housing Rent Allowance (HRA), conveyance allowance, gratuity, medical expenditures, Employee Provident Fund (EPF,) and all other allowances.
While in-hand salary is an amount received by an employee before any deductions, net pay is the amount received by an employee after all deductions have been made.
In other words, in-hand salary is the monthly payment made by the company to the employee. PF and gratuity are not included in this.
Dive deep and learn to calculate your gross salary here. Finally, we’ve reached the crucial part.
Components of a Salary Slip.
Every salary slip will have the company name, employee name, designation, and employee code, among other things.
Then comes the Income/Earnings and Deductions, which are the two main types of salary components. Here’s what everything under that umbrella means:
Basic Compensation: This is the most essential component of your salary, accounting for 35 percent to 40% of your total pay. It also acts as a foundation for calculating the other aspects of pay.
The basic tends to be high at junior levels. As you progress in the company, your other allowance will increase.
Dearness Allowance (DA): It is a percentage of your base pay that is granted to help offset the effects of inflation. It is fully taxable and must be declared when submitting an ITR.
House Rent Allowance (HRA): This is an allowance to assist people in paying their rent. The amount of HRA varies by location and ranges from 40 to 50 percent of base pay. HRA can help you save money on taxes. The exception must include at least one of the following:
- Rent is paid once a year, minus 10% of pay (basic + DA).
- Actual HRA received
- 50% (basic + dearness allowance) if the location is (Mumbai, Kolkata, Chennai, Delhi) and 40% (basic + dearness allowance) if the location is some other city
Conveyance Allowance: The amount an employer pays an employee to commute to and from work is known as the Conveyance Allowance. It's a concession.
As a result, it is tax-free up to a certain point. Conveyance allowance too, might help you save money on taxes.
The exception must include at least one of the following:
- Monthly income of INR 1600
- Received actual conveyance allowance
Performance and Special Allowances: Employees are offered performance and special allowances to motivate them to perform better. This component is also entirely taxed.
Other Allowances: This category includes all of an employer's additional allowances, regardless of the reason. Such allowances may be classified under a specific heading or grouped as "Other Allowances" by an employer.
EPF (Employees Provident Fund): This is a mandatory deduction from your pay-check and an accumulation of funds for your retirement. This portion of your payslip represents at least 12% of your basic pay and is deposited into an EPF account. Notably, under Section 80C of the Income Tax Act, your payment to the EPF is tax-free.
Professional Tax: It is imposed on all individuals with an income, including salaried workers, professionals, and traders. However, it is only imposed in a few states, which are Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura, Jharkhand, Bihar, and Madhya Pradesh. This amount is taken out of your taxable income and only amounts to a few hundred rupees each month. It is determined according to a person's tax bracket.
TDS (Tax Deductible at Source): TDS is the amount of tax deducted by your employer on behalf of the Income Tax Department. It is determined by the employee's gross tax bracket. This cost can be reduced by investing in tax-free investments such as equity mutual funds (ELSS), PPF, NPS, and tax-saving FDs and providing your employer with the necessary papers.
There you have it, your mini-guide to your salary slip. Now the next time you get your employee pay slip, you know what you have to do. Read it, understand it and check if you can save any taxes anywhere.
Now, as you have understood all aspects of Payslips, we hope it will also help you to make better decisions with your saving plans. You can always save while you spend using Jar App, which not only helps you to save money, it also invests in Digital Gold.