Salary slip is the most eagerly awaited paper for an employee. The salary slip presents details of salary paid by the employer to its employees. The details in salary slip depends upon the salary structure offered to the employees for their services. The salary slip comprises of different components, such as basic salary, allowance, perquisites, etc.
It is very important for each employee to understand their salary structure and details in salary slip for a better financial planning. The detail understanding of each of the component is given below:
Components in salary slip
Basic Salary
Basic salary is the base income of an employee, comprising of 35-50 % of the total salary. It is a fixed amount that is paid prior to any deductions or increases due to bonus, overtime or allowances. It will be the first item in the salary slip. The basic salary will vary for different grade and designations. The basic salary is determined based on the designation of the employee and the industry in which he or she works in. Most of the other components, like allowances, perquisites, taxes are based on the basic salary.
Allowances
Allowance is another component in salary slip which is added to the total salary to be paid. It is an additional amount payable to employees during the course of their regular job duty. It can be partially or fully taxable, depending upon the type. Allowances provided and the limits on it will differ from company to company or government, according to their policies. Few of the well-known allowances are,
Dearness Allowance (DA)
It is part of salary structure of government employees of India. It is a compensation given to keep the salary at par with current cost of living. In other words, it is a compensation to beat inflation. It is calculated as a percentage of basic salary. The government announces DA rate every quarter. It is paid to both working and retired employees. It will appear right after the basic pay in salary slip.
House Rent Allowance (HRA)
A house rent allowance is paid to employees for meeting the cost of renting a home even if it is provided by the employer. The annual house rent allowance received is allowed to deduct from income for the purpose of calculating of taxable income. As per section 10(13a) of Income Tax Act, the least of a) actual HRA received, or b) 50% of [basics + DA] for those living in metro, c) 40% of [basic + DA] for those living non-metro or d) actual paid which is less than 10% of [basic +DA] is exempted. However, if the employee is staying in own house, the HRA received is fully taxable. The HRA will appear in salary slip after the DA.
Conveyance Allowance
Conveyance allowance, also known as transport allowance, is a kind of allowance offered by employers to their employees to compensate for their travel expense to and from their residence and workplace.
Leave Travel Allowance
It is offered by employers to their employees to cover the latter’s travel expense when he or she is on leave from work. The amount paid as leave travel allowance is exempt from tax under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the mode of travel needs to be air, railway or public transport. Leave travel allowance is eligible for deduction for calculating taxable income.
Medical Allowance
Medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditure.
Books and Periodicals Allowance
Books and periodicals allowance is a type of allowance provided to employees for helping them meet the expenses associated with purchase of books, periodicals and newspapers. It is tax exempt to the extent of actual expenditure incurred towards purchase of books and periodicals.
Apart from the above there could be other types of allowances such as City Compensatory Allowance, Special Allowance, Uniform Allowance, Cost of Living Allowance Maternity/Paternity Allowance, Car Allowance etc. depending upon the policy of the government or the company/corporate. The basic pay along with the allowances makes the gross salary of the employee. All allowances may not be shown separately in salary slip. It may be clubbed as a special allowance to record on salary slip.
Employee Provident Fund
Employee Provident Fund (EPF) is an employee benefit scheme where investments are made by both the employer and the employee each month. It is a savings platform that aids employees to save a portion of their salary each month, from which withdrawals can be made following a month from the date of cessation of service or upon retirement. Also, withdrawal is permitted during service subject to fulfilment of norms.
At least 12% of an employee’s basic salary is automatically deducted and goes to the EPF every month. The employee may consider higher deposit if he or she wishes. The contributions are managed by the Employees Provident Fund Organization (EPFO). If the employee opt for EPF, it will be shown as deduction in salary slip.
Perquisites
Perquisites, also referred to as fringe benefits, are the benefits that some employees enjoy as a result of their official position. These are generally non-cash benefits given in addition to the cash salary. Some examples of perquisites include provision of car for personal use, rent-free accommodation, payment of premium on personal accident policy, etc.
The monetary value of perquisites gets added to the salary and it will appear along with allowances in salary slip. But if the perquisite is considered being availed by the employee, money value of it will be deducted from salary. Tax on perquisite is paid by the employer.
Income Tax
Income tax is a tax levied on the income earned by salaried employees. Employers deduct income tax at prescribed rates, from the salary paid to employees, and pay it on their behalf to the Government. Based on salary structure of the employee, the taxable income and tax thereon is estimated for the financial year. The same is deducted every month from the salary on pro-rata basis. In the last quarter of the financial year, documentary evidence are collected from the employee towards tax saving to finalise the actual tax deduction.
A person earning an income from salary or by practicing a profession such as chartered accountant, company secretary, lawyer, doctor etc. are required to pay professional tax. Different states have different rates and methods of collection. In India, profession tax is imposed every month. It is a direct tax.
Employee’s State Insurance Corporation (ESIC)
If a company has 10 or more employees (20 in case of Maharashtra and Chandigarh) whose gross salary is below Rs. 21,000 per month, then the employer is required to avail ESIC scheme for such employees. The employer’s contribution will be 3.25% of gross salary, whereas the employee’s contribution will be 0.75% of gross salary.
Deductions
After arriving at gross salary which is sum of basic pay plus DA plus allowances plus money value of perquisites the deductions are applied. It includes EPF contribution, ESIC contribution, loan recoverable, contribution towards association fee, tax and cess and tax. The figure arrived at is the net salary of the employee. A typical salary slip looks like as below:
Apart from salary & provident fund, an employee gets two other benefits, though these are not shown in salary slip.
Gratuity
Gratuity is a lump sum benefit paid by employers to those employees who are retiring from the organization. This is only payable to those who have completed 5 or more years with the organisation. The gratuity amount is paid in gratitude for the services rendered by the individual during the period of employment. According to the Payment of Gratuity Act, 1972, the general formula for gratuity calculation is (15*last drawn salary*the working tenure)/30. Most firms with a workforce of 10 or more employees come under the Act.
Pension
There are three major components to the Indian pension system: the civil servants pension or Old Pension Scheme, Employee Pension Scheme run by EPFO and the unorganised sector pension called the National Social Assistance Programme (NSAP) under Ministry of Rural Development.
The minimum eligibility period for receipt of pension is 10 years. A Central Government servant retiring in accordance with the Pension Rules is entitled to receive pension on completion of at least 10 years of qualifying service.
In the case of Family Pension the widow is eligible to receive family pension on death of her spouse after completion of one year of continuous service or even before completion of one year if the Government servant had been examined by the appropriate Medical Authority and declared fit for Government service.
W.e.f 1.1.2006, Pension is calculated with reference to emoluments (i.e. last basic pay) or average emoluments (i.e. average of the basic pay drawn during the last 10 months of the service) whichever is more beneficial. The amount of pension is 50% of the emoluments or average emoluments whichever is beneficial. Minimum pension presently is ₹9000 per month. Maximum limit on pension is 50% of the highest pay in the Government of India (presently ₹1,25,000) per month. Pension is payable up to and including the date of death.
National Pension Scheme
Since 2004, the above pension system has been changed. Whoever has been employed after 2004 are covered either under National Pension Scheme or EPS of EPFO. The Atal Pension Yojana (APY has been made available for the unorganised sector. If you are still covered under old pension scheme it will written on your salary slip.
The National Pension System (NPS) is a voluntary defined contribution pension system administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the decision of the Government of India to stop defined benefit pensions for all its employees who joined after 1 January 2004. While the scheme was initially designed for government employees only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to create a pensioned society in India.