Understanding the Salary Slip – Format, Importance, Download & Components

What is the Importance of Salary Slips?

As mentioned above, your salary slips are of great worth as it contains all the information about your salary structure, its break up, and the deductions. Companies are also legally bound to create salary slips for all employees as proof of salary payments and deductions made. So it is recommended that you understand your salary slips and their importance.

1. Income Tax Payable Your salary slips determine the amount that needs to be paid as income tax, and the amount of TDS refund claims you can file in income tax returns.
2. Loan or Credit Card If you are applying for a loan or credit card, the bank will ask for your payslips and verify if you are eligible for the loan amount you have applied for.
3. Increment Proof Your salary slips also play an important role in determining your salary. For example: if you are changing jobs, then your new employer will ask for your salary slips. Your next hike in salary will be determined on the basis of salary slips provided by you.
4. Alimony Ground In cases of divorce, alimony is determined on the basis of the husband’s/wife’s salary slips.
5. Government subsidies Salary slips also entitle you to benefit from government subsidies in medical care or in the public distribution system of food.
6. Visa Application In some cases, while applying for visas or for universities, you might have to furnish your salary slips as legal proof of your employment and position held.

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What are the Components of a Salary Slips?

Download the salary slip here

The above image displays what a standard pay slip looks like. As you can see, there are many terms and sections referred to on the pay slip. To understand them all, refer to the ‘Components’ section below. Before that, it is important to know the difference between CTC and in-hand salary:-

1. Cost to Company (CTC) vs Gross Salary
   

   Cost to Company (CTC)	Gross salary
   Total amount that a company spends on an employee. It may include direct or indirect benefits both.	The total amount that a company pays to an employee before deductions.
   CTC includes : Free Meal Cab services Reimbursements Contributions etc	Gross salary includes : Contributions to PF HRA Basic pay Dearness Allowance etc
   CTC = Gross Salary+EPF+Gratuity + Other variable pay	Gross Salary = Net salary + All deductions like TDS, Professional tax etc

2. In-Hand or Take-Home Salary:
   This is the net salary that an employee takes back home from his employer. It is computed after deducting all allowances and taxes like income tax, professional tax, PF contributions, etc.
   Taxability: In hand, salary is 100% taxable.
   As you can see, the pay slip is divided into two sections: Earnings and Deductions. So we will study the components of both sections separately.

Below is the component for the Earnings/Income part

1. Basic Salary:
   This comprises approximately 40% of your total salary and is the most important component. Although, the percentage of the basic salary varies from company to company. All the other components mentioned on the salary slips are based on your basic salary. Taxability:Basic salary is 100% taxable.
2. Dearness Allowance:
   The major objective of this allowance is to sublime the effect of inflation on the employee. This allowance is directly related to the employee’s cost of living and differs from employee to employee. For salaried employees, it's fully taxable.
   Taxability: Dearness Allowance is fully taxable.
   Part of in-hand: Yes
3. House Rent Allowance:-
   This allowance is paid to help the employees pay their rent. The allowance percentage depends on the location. This allowance is also taxable but qualifies for tax exemptions under certain circumstances; you should pay the rent and possess supporting documents like lease agreement/ rent receipts/ PAN of the owner.
   Taxability: HRA is partially taxable as per the limits specified by Income Tax provisions and rules.
   Part of in-hand: Yes
4. Conveyance Allowance:
   This is given to the employees to reduce their commuting costs between home and office. It’s paid on a monthly basis and is partially taxable. Sometimes, it is added to your cash-in-hand amount, but it mostly depends on how much you spend on transportation and if you have receipts to prove it.
   Taxability: Conveyance allowance is partially taxable as per the limits specified by income tax provisions and rules.
   Part of in-hand: Yes, depending upon the amount you spend.
5. Leave Travel Allowance:
   This allowance covers the travel cost for the employee and their immediate family while on leave. However, exemption against this facility is offered only for 2 journeys performed in a block of 4 years and does not include your accommodation and food. You need to provide your employer with valid documents proving your travel.
   Taxability: LTA is exempt under certain conditions.
   Part of in-hand: Yes
6. Medical Allowance:
   The company tries to cover your medical expenses while you are employed with them. It’s not an advance payment but is reimbursed if you provide sufficient receipts like medical bills. The reimbursement amount differs from company to company
   Taxability: It is fully taxable
   Part of in-hand salary: Yes
7. Performance Bonus:
   Incentives and encouragements are always healthy for the employees. However, this allowance is 100% taxable and is paid once or twice a year.
   Taxability: Fully taxable
   Part of in-hand salary: Yes
8. Other Allowances:
   These allowances vary from company to company. These could be paid by the employer for any reason, and such types of allowances are clubbed under ‘Other allowances’. Although, if the employer wants, he/she can create a different slab for such allowances.
   Taxability: Fully taxable
   Part of in-hand salary: Yes

Deductions

1. Deduction under Chapter VI A:
   All deductions under chapter VI A i.e. deductions allowed in respect of most popular investment options under sections 80C, 80D till section 80U, are mentioned under this head.
2. Provident Fund:
   At least 12% of the employee’s salary goes to the Provident Fund, which is the accumulation of funds for the employee’s retirement period. This amount does not fall in the tax bracket and earns interest on the contributions made by the employee and the employer.
3. Professional Tax:
   It is a state-levied tax and is applicable only in a few states: Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Assam, Gujarat, Chhattisgarh, Meghalaya, Kerala, Orissa, Tripura, Jharkhand, Bihar, Madhya Pradesh, Sikkim, Puducherry, Manipur, Nagaland, and Mizoram. It is calculated based on the employee’s tax bracket and is taken from your taxable income.
4. Tax Deductible on Source (TDS):
   You get your salary after your employer has deducted TDS on behalf of the Income Tax Department. If you wish to reduce the tax computed on your salary, you can invest in tax saving schemes and furnish the documents to your employer so they can revise the tax payable.