Author Raymond Cvikota once said, “Today’s pay slip has more deductions than a Sherlock Holmes novel.” And that may be the case for most of us. When you join a company, you are promised a cost to company (CTC), and that usually is a handsome amount, but when the salary actually is credited into your account, the figure somehow looks much smaller. Your monthly salary slip is not the easiest financial document to decipher. Salary is divided into three parts — earnings, perks/exemptions and deductions. Though the break-up of the CTC varies from company to company, here are a few components that are mostly common.
Basic: Undoubtedly, the basic component of your salary is the most important. Not only is it the biggest portion of your salary, it’s also a fixed amount. “Out of the 100% of your CTC, the basic is usually around 40-50%,” says Kuldip Kumar, executive director, tax and regulatory services, Pricewaterhouse Coopers.
This, of course, varies from company to company. In fact, those at a junior level usually have a higher amount as basic compared with those at senior level. Basic salary matters because it is taxable. So, if you have a very big amount as basic, be prepared to pay tax on it. “House rent allowance and employee provident fund are linked to the basic salary,” says Kumar.
House rent allowance (HRA): “HRA is a very common element of any salary structure in India,” says Parizad Sirwalla, partner, KPMG India. “The same is taxable as salary income subject to specific exemptions.” HRA is usually up to 50% of basis salary and will vary according to your designation. You can get an exemption up to certain limit provided you actually pay house rent and provide the relevant documents. This is subject to an exemption calculated as the least of: HRA allowance received by the employee; or Actual rent paid minus (10% of basic + dearness allowance); or 50% of (basic + dearness allowance) in case the location is (Mumbai, Kolkata, Chennai, Delhi) or 40% of (basic + dearness allowance) in case of other cities.
You have to provide original rent receipts, copy of executed lease agreement between employee and property owner, and Permanent Account Number of the property owner. “Exemption is available even if employee owns a house but cannot occupy on account of his employment in another city,” says Sirwalla.
This allowance is paid for commuting between home and place of work. “It is Rs. 800 to cover your work-related travel needs. Up to Rs. 800 is exempt from tax every month,” says Sirwalla.
Leave travel allowance (LTA): LTA is an allowance or amount you get from your employer to travel. You get it when you are on leave from work and travel. LTA is exempt from tax under certain conditions. As the name suggests, it covers only travel expenses and not other expenses such as boarding and food. “You can travel alone or with your family. You can claim exemption for up to two journeys in a block of four calendar years,” says Kumar.
Usually the LTA amount is same as your one month's basic salary.
Special allowance and performance bonus: This allowance is given over and above your basic salary. Keep in mind that this amount is taxable.
Performance bonus is usually linked to your past performance and is usually paid once or twice a year, depending upon the company policy.
Medical allowance: It is tax exempt up to Rs. 15,000 per year. However, keep in mind that only the amount for which you submit bills is tax-exempt. “Medical allowance could be a higher amount, but you will get tax exemption for only up to Rs. 15,000,” says Sirwalla.
Provident fund: This amount is 12% of your basic salary. “Towards provident fund, 12% of your basic wage is deducted and the employer makes a matching contribution,” says Sirwalla. This money also earns an interest. For instance, it was 8.25% in 2011-12. Moreover, these contributions also give you tax exemption under section 80C of the Income-tax Act. You may choose to increase your contribution towards PF, but the employer will match a maximum of 12%. In case you increase the contribution, it will be deducted from your basic salary.
Professional tax: This tax is levied at the state level, and reflects only if you reside in those states. It’s usually a few hundred rupees a month. Maharashtra and Karnataka have this tax.
Income tax: This section shows the tax deducted at source by your company. This tax is deducted according to your tax slab and the documents you may have submitted proving your investments in tax-saving financial instruments. The salary slip also shows perks, exemptions and rebates.
Your salary slip may have more information. However, these are a few components which you need to know.