Understanding the Salary Slip – Definition, Components, Taxes & More

Understanding the Salary Slip
Reading Time: 10 minutes

What is a Salary Slip?

The salary slip is a document issued by the employer to the employee with details of components of the salary. The salary slip is usually issued for a period of a month. It is a legal financial document and can be used as proof of employment as well as income.

 

The salary slip can be provided in a soft copy as well as a hard copy. It is mandatory for the employer to issue salary slips to the employees with details of benefits as well as deductions.
 
Also Read: Will the New Salary Structure Implementation Change your Take-home Salary?
 

What is the Importance of a Salary Slip?

The salary slip is provided during the employment of the candidate. The pay slips help in many cases such as proof of employment, loan application, and future employment and to avail government subsidies as explained below.

 

Employment Proof

There are many incidences where you need to provide proof of your employment. Salary slips as proof of employment can be used for many occasions such as visa applications, and college applications. It indicates proof of your last drawn salary and hence indicative of your annual income. The salary slip also mentions your designation that provides idea about the career trajectory and can be helpful.

 

Income Tax

Planning your taxes properly helps to manage the tax outflow well and it is essential when it comes to managing personal finances. The salary slip shows a better picture of the components that comes under the Income Tax Act. The tax deductions are to be calculated based on the take-home salary of the employee and TDS helps to plan the tax liability in advance.

 

A salary slip contains details of all the earnings such as basic salary, medical allowance, HRA, and travel allowance as well as deductions including professional tax, EPF, and TDS. In addition various components of the salary slip are taxed differently which we will discuss these tax requirements further, later in the blog.

 

For Future Employment

As mentioned before the salary slip is legal proof of employment and the pay that the employee is currently withdrawing. While hiring a new employee the employers ask for the salary slip to confirm that the candidate is currently employed. The salary slip also serves as a base for the negotiation of the future salary. The components in the salary break up such as basic salary, and allowance is also important to form the CTC structure to be offered to the employees.

 

Avail Government Subsidies

Various facilities and benefits that government are based on the income of the receiver. That criteria is to ensure that the needy group of the population should get the benefits. So the eligible to be a reciever of the benefits one has to show that they have certain income. Here, salary slip can also help to show eligibility for cer tain government policies that include free as well as subsidised facilities.

 

Avail Loans and Credit card

It is no secret that the creditor always want to ensure that they get their money back with the interest. The ability of the borrower to return the loan depemds on their income. The salary slip contains the details of your employment earnings and deductions. That helps banks to decide the creditworthiness of the person. The income of the employee also helps banks to decide the credit limit that they should allow to the person. This is why the salary slip is important document to support your loans or credit card applications.

 

Components of the Salary Slip

There are usually two sections in the salary slip. One side is about incomes in the salary slip while the other side lists the deduction.
 

Incomes

The various incomes of the employee are included in the salary slip such as benefits and basic salary. The various allowance that the employee receives is explained below.

 

Basic Salary

The Basic salary is the first earning component in the salary slip. Generally, it tends to be 30-35% of the CTC and is a taxable component of the salary. At the junior level, the basic pay for the employees tends to be higher than the allowance. While as they grow in their career the allowances become the major component of the tax saving. The many other components of the employee’s salary slip are calculated based on the employee’s basic pay.

 

House Rent Allowance (HRA)

House Rent Allowance is given to employees for coverimg the expense of renting a housing shelter for themselves. HRA that is procvided to the employees living in the metro cities has to be 50% of the basic pay whereas for the employees that leave in other cities it is 40%. The housing rent allowance is divided into taxable as well as non-taxable components. That means the tax on the HRA is exempted up to a specific limit only. The HRA appears on the earnings side of the salary slip.

 

Dearness Allowance

The dearness allowance is given to the employee to soften the blow of inflation. The component is directly based on the cost of living. The usual dearness allowance is between 30-40% of the basic pay. As the cost of leaving varies from city to city, the dearness allowance is also a location-dependent somponenet. The component is considered as pay and hence is completely taxable. As an earning, the dearness allowance is listed on the income side of the employee’s salary slip.

 

Conveyance Allowance

Conveyance allowance is the amount an employee gets from the employer for the travel expenses related to work. The conveyance allowance is exempted from the tax up to certain limits. The conveyance allowance is considered part of earnings and appears on the income side of the salary slip.

 

Medical Allowance

The medical allowance is the amount paid to the employee for their medical expenses. If the employee claims the amount of the medical allowance against the proof of medical bill it will be excepted from the tax. On the other hand, if there are no medical bills submitted to the employer for claiming the amount the employee will be given the amount for a medical allowance. The medical allowance that the employer provides their staff will be taxed fully and appears on the earnings side of the salary slip.

 

Leave Travel Allowance

The leave and travel allowance is given to the employees by their employer to cover the cost travel cost while they are on leave. The allowance includes the expenses for the employee as well as their immediate family members. The leave travel allowance is exempted from the tax up to a certain limit and you have to submit proof of travel to avail of that tax exemption.

 

The leave travel allowance tax exemption is provided only for your expense that occurred for the travel itself and not any other cost occured during the period of the leave. It is also important to note that the tax exemption on the travel exception can be availed only on a couple of journies undertaken in the span of four calendar years.

 

Special Allowance

The special allowance is the performance-based allowance given to you to encourage you to continue good work. Some allowances are exempted from tax under Section 10(14) of the Income Tax Act, 1961. It’s important to note that the special allowance is a part of a gross salary. The special allowances given to you depends on the company’s policies. The special allowances thus highly differ from company to company. Special allowances are broadly divided into two categories as personal allowances and official allowances.

 

A few types of personal special allowances that are provided by the employer in your salary slip can be as listed below.

 

Children’s education allowance

This is the amount that is given to the employee in their salary to aid the education of their children. The allowance is given for only two children and the maximum tax exemption for this allowance is ₹100 for each child. The remaining amount received by the employee under the children’s education allowance is taxable.

 

Hostel allowance

This allowance is provided for the children of the employee for maximum of two children and this is exempted from tax up to ₹300. The remaining amount provided by the employer seen in the salary slip is taxable.

 

Transport allowance

This allowance is provided to cover the travel expense of the employee. The amount exempted from tax up to ₹1600 for a fully-abled person. The tax exemption for a handicapped person is extended to ₹3200 for handicapped employees. The tax exemption is considered on the monthly allowance provided to the employee. The amount that is received over the exempted sum in the salary of the person is taxable.

 

Underground allowance

The underground allowance is given to the employees working in the mines underground. Whatever allowance you receive under this section the amount of ₹800 is exempted from taxation every month and the rest is taxable.

 

Tribal areas allowance

This allowance can be given to you if you are an employee living in the hilly area, agency area or scheduled area. This allowance is available in the state of Assam, Tripura, Uttar Pradesh, Madhya Pradesh, Odisha, Karnataka, and Tamilnadu. The tax exemption is made for this special allowance of up to ₹200 every month. If the employer provides an amount above that level it will be taxed.

 

Island duty allowance

This special allowance is given to the employees in the armed forces, who are doing their duties on the islands of Andaman and Nicobar Islands and Lakshadweep Group of Islands. A tax exemption is made for this allowance is availed up to the amount of ₹3250 every month while the amount given above that level is taxable.

 

Outstation allowance

The allowance is paid by the railways, roadways and airways to their employees in lieu of daily allowance. Exempted to at least 70% of the allowance, ₹10,000 per month.

 

The Various types of Official Allowance

Daily allowance

This is an allowance given to the employee to cover the expense they incur on their daily duty. The allowance is to be given to the employees every month along with their salaries. This income is exempted from the income but saving is taxable.

 

Travelling allowance

Travelling allowance is for the cost of travel on tour on the transfer of duty. This is a non-taxable income in the employee’s salary slip.

 

Conveyance allowance

This is an allowance for the conveyance while performing while the employee is doing their duties. The amount is exempted from tax for employee.

 

Helper allowance

This allowance is supposed to cover the expenses incurred for hired help by the employee during the span of duties.

 

Research allowance

It is granted for encouraging academic research and training in the research pursuit. This allowance is exempt from income tax.

 

Uniform Allowance

This is the allowance for the purchase and maintenance of the uniform during duty. the uniform allowance is exempted from taxes and considered income.

 

Deductions

The deductions are also a part of the salary slip and some of the deductions such as TDS, professional tax, EPF and much more.

 

Professional Tax

The professional tax is the tax levied by the state government on all individual who earns money through any medium. The amount collected differs from one state to another. However, the limit is set at ₹2500 per year. Some states have different slabs and amounts to be deducted from the salary. There are a few states and union territories in India where professional tax is not charged on an employee’s salary slip.

 

In general, the professional tax is paid in 12 instalments. There are equal instalments for 11 months plus one different instalment in the month of February which is usually higher than the deduction paid in other months.

 

The employer is liable to collect a certain amount of the salary as a professional tax that is predetermined by the state. It is again the duty of the employer to pay this amount to the amount. In an employer fails to collect and submit this amount they might need to pay the penalties. If someone is not working for an employer can pay their own tax by registration.

 

Tax deduction at source

As the team suggest TDS is the tax deducted at the source of the transaction. The TDS is deducted on various types of payments such as commission, salary, rent, professional fees and much more. The TDS is deducted by the person who is making the payment for the liability of the one who is receiving it.

 

The employer deducts the TDS from the employee’s salary on behalf of the income tax department. The tax deduction at the source on the salary is made on the basis of the gross tax slab of the employee. The TDS appears on the deduction side of the salary slip.

 

The TDS can be reduced by making various investments such as Public Provident Fund (PPF), National Pension Scheme (NPS), fixed deposits, equity funds or equity-linked saving schemes. The employee needs to submit proof of their investment to claim the return on tax deduction at the source in the salary.

 

Employee Provident Fund (EPF)

The Employee Provident Fund (EPF) is a fund where the employee and the employer make an equal contribution. The contribution is a predecided amount and is managed by the Provident Fund Organisation of India (EPFO). This is considered a long-term investment. The PF does not need that the employee needs to have a lump sum as an investment to get some security in their future. The investment can be helpful to the employees during emergencies and having financial aid at the time of retirement.

 

The investment made by workers in Provident fund EPF is exempted from the tax. The income that the person earns on this investment is also exempted from tax up to ₹1.5 Lakhs. The sum acts as a financial saving for the long term. The rate of interest on EPF investment is 8.5%. The contribution for EPF is 12% of the employee’s basic salary and the same from the employer. The deduction is made every month and is reflected on the deductions side of the salary slip. It is important to note here that all this contribution does not go to the provident fund only. The 8.33% of the employee’s contribution goes to the provident fund and the rest goes to the EPF scheme.
 

Also Read: How to claim PF Online? Step by Step Guide

 

What is the difference between Cost to Company (CTC) and in-hand and gross salary?

The employee gets compensation for their work from the employer. The total expense that the company bear for the employee in return for their work is called a cot to the company (CTC). When someone thinks of a new job opportunity and their income they have to think about both the costs to the company as well as the gross salary. To understand the components of the salary slip you need to get the difference between CTC and gross salary. As there are some components that are included in the cost to the company but not in the gross salary.

 

The gross salary is the amount payable to the employee every month before the deductions are made. And the amount that the employee actually receives after deduction is called in-hand salary. While the cost to the company is the amount that employers will spend on their employees throughout the year. The CTC hence then included the components such as contribution, reimbursements and tax benefits.

 

In addition to the basic salary, the cost to the company includes various allowances such as HRA, medical allowance, bonuses, reimbursements and incentives. In addition to that CTC also includes the employer contribution such as PF, gratuity, superannuation, and medical insurance. The other components of the CTC include non-cash concession, stock option plans, leave encashments and much more. These components may vary from company to company.

 

Gross salary is the amount that the employer is supposed to pay the worker every month. There are a few components of the gross salary that vary according to the individual company. Whereas the gross salary of the employee does not include elements such as employee provident fund and gratuity.

 
Also Read: What is Gratuity? How to Calculate Gratuity from your salary?
 

So the components that are included in the gross salary are basic salary, dearness allowance, house rent allowance and much more. However, there are contributions that employers pay as employer contributions are included in the cost to the company but not in the gross salary.

 

Summary

The salary slip is a legal document that shows various components of the employee’s salary. Usually, there are two sections in the salary slip income and deductions. This includes basic salary, allowances, taxes and statutory deductions to contributions. Various components of the salary slip are taxed differently. A salary slip also acts as legal proof of your income and employment. You need to have a good understanding of the components of the salary slip to plan your taxes and investments wisely.

 

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