Raymond Cvikota once said, "Today's pay slip has more deductions than a Sherlock Holmes novel." With that said, all that everyone is concerned about is the final figure that goes into their accounts. But it is vital that people understand their salary structure and the components of their pay slip properly. Let us start with basics of your CTC:
What is a pay slip?
A pay slip, otherwise known as a pay stub or paycheck stub, is the document that employees receive when they are paid. It acts as a notice that the money has been deposited into the employee's account. Alternatively, it comes along with the paycheck. Each country has laws as to what must be included on a pay slip. Usually, they include details of the gross wages for the pay period and the taxes and any other deductions the employer is required to make. Personal deductions like retirement plans, pension contributions, insurance, or charitable contributions are then taken out of the gross amount to reach the final sum to be paid.
Why do I need my payslip?
In order to gauge your taxability, understand your CTC salary structure and the actual benefits that you are being offered, you need to take a good look and understand all the parts of your payslip. Here is why it is important.
- Taxability: The amount you need to pay every year as taxes is dependent on the amount of money you make every year. Your pay slip is the official document that is considered to calculate this.
- Benefits: You can access certain services and benefits from the government that are provided at subsidized rates
- Loan and borrowing: Credit, mortgage, and borrowings of any kind can be availed depending on the amount in your salary slip. Pay slips help banks assess your creditworthiness and repayment capability.
- Proof of employment: Salary slips are required when you change jobs. Employers typically ask for salary slips to be able to negotiate a sum. It helps them decide how much to pay you.
- Proof of complete payment: For the employers as well as the employee, a pay slip is irrefutable proof of the monetary transaction being complete.
Components of a pay slip:
The salary structure remains the same, no matter the company or country. Basically, your pay slip is categorized into roughly three parts: Basic Salary, Allowances and Deductions. The topmost portion invariably contains the personal and basic organizational identification details, followed by the basic salary.
Basic Salary or Gross Salary
Your basic salary is a fixed amount that serves as a basic monetary remuneration of your work that you do for a company. Typically, your basic pay is 40% to 50% of your CTC. Regardless of the amount, your basic salary is completely taxable.
House Rent Allowance(HRA)
House Rent Allowance or HRA is provided to all employees by their respective employers. HRA is given to employees to cover their accommodation and renting expenses. It is not applicable to employees who reside in their own house or in a rent-free accommodation.
Employees' Provident Fund
EPF (Employees' Provident Fund) refers to a mandatory amount which is contributed by both the employee and the employer. Any salaried individual whose base salary is above Rs 6,500 per month is liable to pay it.
Professional Tax
According to the Chartered Club, Professional Tax is levied on the income by trade, profession or employment. It is levied by the state government, and the amount varies according your income.
Tax Deducted at Source (TDS)
TDS is a compulsory tax levied by the government. TDS refers to the Income Tax deducted by your employer and it is calculated for individuals according to the Income Tax slab under which they fall.
Conveyance or Transport Allowance
Your employer is obliged to pay you a Conveyance or Transport Allowance to compensate for the cost of the commute between your residence and the office. You can avail tax exemption of up to Rs. 1,600 per month on this.
Medical Reimbursement
A medical reimbursement is provided to cover the medical bills that employees incur. With the medical reimbursement facility, you can submit medical bills for all medical expenses and have the amount reimbursed.
Education Cess
In an effort to fund primary and secondary education initiatives for children of our country, the government has levied a tax which is referred to as Education Cess. The amount charged is usually 4% of your Income Tax as per the latest 2018 Budget.
Fuel Reimbursement
If your mode of transportation to the office is a vehicle of your own, you can claim compensation for petrol/diesel expenses. However, you have to provide the original bills and receipts for the same.
Telephone/Mobile Expenses
Submission of your telephone/mobile bills to your employer is necessary to get your telephone/mobile bills reimbursed. You do not have to pay any tax on this expense.
Food Coupons
If you are provided with meal coupons or vouchers, they are added as a component in your salary slip. Typically, these have an exemption limit up to Rs. 50 per meal.
Leave Travel Allowance (LTA)
The LTA is the amount paid by employers for an employee's travel within the country. It is usually considered a part of an employee's salary package, and the amount claimed as (LTA) is tax-free.
Performance Bonus
A performance bonus is provided to employees as a token of appreciation of their hard work, usually after a performance appraisal.
What is the CTC?
The CTC or Cost to Company is the total cost that is incurred by the organization for hiring an employee. To calculate the CTC, we add the basic salary to the allowances or benefits provided to the employee. For example: If an employee's salary is Rs. 10,000 and the company pays an additional Rs. 2,000 for their health insurance, the CTC is Rs. 12,000. Employees may not directly receive the CTC amount.
For further questions on the salary structure or to avail any of our Outsourced CA services contact us today at 98218690955. The author can also be reached at contactus@revmystartup.com
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