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I bet you never knew the perks of understanding your Salary Structure better!

For most people, salary is simply a paycheque they get at the end of each month. The salary structure mentioned in the slip that comes with it hardly attracts any attention since people don't want to do the math and figure out what each and every component of a salary structure means and how it is derived.

salary slip

salary slip

The fact is that you can achieve a lot more if you just understand the basic salary structure. You can:

  • Plan your investments so that you can optimally utilise the deductions and reduce the tax liability. This will in turn reduce the TDS being deducted from your salary every month.
  • Evaluate different job offers in order to determine which one is more beneficial in terms of salary structure.
  • Understand how much of your total salary goes into forced savings like Employees’ State Insurance (ESI), Employees Provident Fund (EPF) etc. This components are determined by your employer and are not under your control.

So let us first understand what are the different components of a simple salary slip.

As you can see in the salary structure here, the “Earnings” and “Deductions” are displayed separately. Earnings will contain the components which are paid to you and as the name suggests, deduction will contain the amounts which are deducted from what is paid to you.

Let’s focus on the the income part of the salary slip first:

Serial No. Component Tax Implication
1 Basic salary: This is the major component of your salary and it forms the basis for some of the other components of the salary structure. It is a part of your take home salary and is 100% taxable
2 Dearness Allowance: This allowance is paid to counter the inflation impact. It is calculated as a percentage of basic salary. Currently only Government employees have a fixed rate of allowance. There are no compulsion for a private or public company to pay Dearness allowance. It is a part of your take home salary and is 100% taxable
3 Conveyance Allowance: This allowance is granted to cover the cost of travelling between home and work.

The lower of the following will be exempt from tax:

  1. Rs. 1600 per month or
  2. Conveyance actually received

So for eg. if you receive Rs. 2000 as conveyance allowance, than Rs. 1600 will be exempt and Rs. 400 will be taxable

4 House Rent Allowance: For salaried individuals this is the allowance to pay the house rent. This may consist of 40% - 50% of your basic salary.

The lower of the following will be exempt from tax:

  1. 40% of your basic salary
  2. Actual rent paid minus 10% of the basic salary
  3. HRA actually received from the employer

If the person does not live in a rented premises but still gets the HRA, then the whole amount will be taxable.

5 Medical Allowance: This allowance is given to employees to cover the medical expenditures incurred during the employment period. These are usually in the form of a reimbursement so the employee has to submit the proof of expenditure incurred Maximum Rs. 15,000 is exempt per annum subject to submission of proof of medical bills.
6 Special Allowance & performance bonus: These allowances are over and above your basic salary. Performance bonus is usually linked to your past performance and is usually paid once or twice a year depending on the company policy These allowances are 100% taxable
7 Leave Travel Allowance: This allowance allows the employee to take on a trip within India with family. The allowance is based on actual expenditure incurred and is allowed for the shortest distance on a trip. An employee can take two trips in a block period of four years The exemption is allowed for the actual expenditure incred for the trip subject to certain limits. Any expenditure incurred during the trip for the purpose other than travel will not be exempt LTA.

After understanding the components which adds to your salary income, let’s understand the deduction part of your salary structure now:

Serial No. Component Tax Implication
1 Professional Tax: It is a tax on employment which is levied and collected by different states. This tax is deducted from your salary by the employer and deposited to the state government. Professional Tax is allowed as deduction from your salary income.
2 Provident Fund (PF): almost 12% of your basic salary goes towards Employee’s provident fund. This amount is matched by the employer subject to certain limits which may vary as per company policies.
  • This is a forced investment since every company with  over 20 employees, has to contribute towards PF.
  • It is allowed as deduction from total income.
3 Tax Deducted at Source (TDS): Based on your total taxable income, your tax is calculated as per the applicable slab rate. This tax is deducted from your salary by your employer and deposited to the government on your behalf. You can find your TDS from form 16, part A which is generated by TRACES and provided to you by your employer. This amount represents the tax deducted from your salary and deposited to the government by your employer. This can be lowered by utilising the deduction limits optimally.

Once you have understood these crucial components of your whole salary structure, you’d be able to plan your investments in a better manner so as to reduce the tax liability. You can also look out for growth opportunities where they offer you better take home salary along with a balanced investment plan to meet your objectives.

And since you’d understand your salary structure well enough, you can easily e-file your Income Tax Return online, by yourself.

The article is provided by Quicko.com, engaged in online assisting in online ITR preparation and eFiling. You can sign up with Quicko.com and eFile your Tax Returns absolutely free. The author can be contacted at anand@quicko.com.


Published by

Anand Satyapanthi
(Co-founder at Quicko.com, Chartered Accountant)
Category Income Tax   Report

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