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The monthly salary that is credited to your bank account is always less than what you signed up for in the employment offer letter. This is so because of the structure of your salary and tax implications on it. Although it is not the easiest financial document to decipher, but it is not very difficult to decode. ‘Salary slip’ tells about your take home salary and the total deductions from the salary in a particular month. Do not directly correlate the monthly income shown in the slip with the cost of company or CTC filler. Your cost to company includes some variable components as well like bonuses, which may appear in your salary only once or twice in a year depending on how it is disbursed by your organization.
The upper section will have information about you such as your employee ID, date of joining, number of months worked in this month, leave details of the month, bank details where salary is credited and other information mentioned. However, a regular salary slip has two major components i-e; Earnings and Deductions.
Components of a Salary Slip: Although a salary slip structure varies from company to company. Here are the components of a standard pay slip.
- Basic Salary: This is the fixed amount that is the largest chunk of your salary. Ideally it should be around 40-50% of your CTC (cost to company) but it can differ from organization to organization. Irrespective of the amount, your entire basic salary is taxable. So basically this is the core of salary and all other calculations are made on the basis of this salary. It depends upon the grade of the employee within the salary structure of an organization.
- Allowances: It is the amount received by an individual paid by his/ her employer in addition to the salary to meet some service requirements. Allowances could be fully taxable, partially taxable and even non-taxable. Given below are the details of each allowance:
Dearness Allowance: This is the separate allowance paid to employees’. This amount is calculated as a percentage of basic salary to mitigate the effect of inflation. This amount is 100% taxable.
Medical Allowance or Reimbursement: This is the allowance that the employer pays for any of your medical expenses during the period of employment. The amount is usually the reimbursed expense and you would need to provide sufficient proof of expenses such as medical bills and doctors prescriptions. Its amount may vary from company to company but up to Rs, 15,000 per year is exempted from tax provided you furnish proof of expenses.
Overtime Allowance: It is the amount paid for the extra time you worked for the company during national holidays etc. It is also fully taxable.
House Rent Allowance (HRA): Allowances related to the expenses of rented accommodation. Employees who live in rented apartments or houses. Therefore, HRA is provided to all employee to meet their accommodation expenses. It is partially or completely exempted from taxes. So, if you pay rent then it’s definitely a great way to save on some taxes.
Conveyance or Transport Allowance: The employer also pay transport allowance for your commute between work and home. You can claim tax exemption of up to Rs. 1,600 per month on this.
Leave Travel Allowance (LTA): This is amount which your employer pay for your domestic travelling. The amount that comes under LTA is completely tax free. You are allowed to claim this for 2 trips in a block of 4 years. This allowance can be taken for travelling expenses only with your spouse, children or parents but not with other relatives.
Performance Bonus: This is the pay that is linked to performance often evaluated on the basis of predetermined targets. This comes to you as a lump sum at certain time of the year. It is also 100%taxable.
Employees’ Special Allowance: Whatever the balance left to be paid to the employee after the above allowances, gets paid under this allowance. Special allowances are also 100% taxable. There many other allowances such as lunch allowance, fuel allowance, telephone allowance etc which are all fully taxable.
Employee State Insurance (ESI): This deduction is applicable for government employees only in order to pay their contribution to get medical benefits. For each different country, there is a fixed amount of employee’s salary to which ESI is applicable. For instance, in a particular country an employee with salary at least Rs. 20,000 will have this deduction implemented.
Provident Fund (EPF): EPF is a compulsory saving amount which is contributed by the employee and the employer. It is the mandated deduction every month from an employer salary. It generally the most sought after option for tax saving and retirement planning.
Professional Tax or Fund: It is a state tax which is implemented in certain circumstances. Levied by the state government, the amount of professional fund varies based on your income. The maximum deductable limit to this though is Rs. 2,500 p.a (per anum).
Tax Deducted at Source (TDS) or Income Tax : This tax or deduction is the most important one. TDS is the income tax which is deducted by the employer based on which income slab you come under. At the start of financial year your employer ask for declaration of savings you will do in current year and calculate a tentative tax based on your income tax slab for that financial year accordingly. You will see your employer deducting TDS on your salary every month based on that calculation. Your salary slip shoes that amount. This tax may change on basis of your salary change, tax slab change or change in your tax saving investments.
So, the net pay that will be credited to your account will be total earnings – total deductions.
Salary slips are of different formats with different components depending upon the type of organization you work such as; a bank, a private company, government sector job, contract job, labor etc. and the purpose you need it for such as visa, loan. Given below are the sample templates:
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Here is download link for this Salary Slip Template 56 in MS Excel Format,
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HALLMARKS OF A SALARY SLIP:
- Your basic salary is the most important salary component as many allowances and deductions are based on it.
- You can reduce the income tax component by investing money in tax saving and taking benefits of tax exemptions on various allowances.
- Your take home salary and CTC (cost to company) is not same at all. CTC is higher than take home salary amount as CTC amount include multiple other benefits like free food, transport, health insurance, bonuses etc.
- Salary slip is an important document it is recommended to preserve a copy of past 6 months’ salary slips. It can be asked for applying visa, credit card, loans etc.
- You should check income or deduction in salary slip every month and in case of discrepancies you can contact HR department of your organization immediately.