What is a Salary Slip?

An employer issues a payslip or salary slip to its employees every month. Typically, a salary slip provides a breakdown of an employee’s salary and deductions for a specific period. Employees can download a pdf version of salary slips or receive a hard copy of the document. Also, employers are legally required to provide employees with a payslip as proof of salary payments and deductions on a regular basis.

Salary statements include the following components on the Income/Earnings side:

  • Basic Salary
  • Dearness Allowance
  • House Rent Allowance
  • Conveyance Allowance
  • Medical Allowance
  • Special Allowance

A salary statement’s Deductions section includes the following components:

  • Professional tax
  • Tax Deducted at Source
  • Employee Provident Fund

What are the Components in a Salary Slip?

Almost every month, employers generate a salary statement for employees. Although they can download salary payslips in pdf format, how many employees are familiar with the format and components of salary payslips? The confusing terms and figures are like a puzzle that one doesn’t want to solve.

There are many people who think salary slips are only valuable when they apply for a loan or a credit card. However, here’s why it’s important to understand salary slip format.

  • When looking to switch jobs, choose wisely from competing offers.
  • By maximizing deductions, you can reduce your tax liability
  • Knowing how much of your salary goes into employee savings (Employee Provident Fund EPF, ESI, etc.)

There are two main categories of salary components: income/earnings and deductions. The salary slip contains basic information such as company name, employee name, designation and employee code.

Incomes

Detailed information about the income portion of the salary slip is provided below.

Basic

The basic component of a salary is the basis for the other components of the salary, as suggested by its name. At junior levels, the basic tends to be large. Other allowances tend to increase as an employee progresses in an organization. The salary is 100% taxable in the hands of the employee. Organizations typically keep basic low so that allowance pay won’t be topped. The salary slip begins with the basic component.

Allowance for dearness

As a compensation for inflation, Dearness Allowance is usually 30-40% of basic pay. Dearness allowance is directly based on the cost of living. Due to this, it varies from location to location. Basics and Dearness Allowance are considered pay for income tax purposes. Therefore, they are taxable. They appear after the basic pay on the earnings side of the pay slip.

Allowance for house rent

In addition to living in rented housing, employees are entitled to a house rent allowance (HRA). As an allowance, housing rent allowance is subject to a specific tax exemption up to a certain limit, which appears on the earnings side of the salary slip. For metro cities, HRA is 50% of basic pay. For all other cities, it is 40% of basic pay. HRA appears on the earnings side of the salary slip. One may be able to save income tax. The exemption is the minimum of the following:

  • Approximately ten percent of basic pay plus DA is deducted from rent each year.
  • Received HRA in actual
  • If the location is Mumbai, Kolkata, Chennai, or Delhi, the salary will be 50% of (basic + dearness allowance da) or 40% of (basic + dearness allowance da) if the location is elsewhere.

Allowance for conveyance

Conveyance Allowances are paid by employers to employees to cover travel costs. As a result, it is tax-exempt up to a specific level. It appears on the earnings side of the salary slip. One can save income tax on conveyance allowances. In order to qualify for the exemption, you must meet the following criteria:

  • Monthly income of INR 1600
  • Amount received for conveyance

Allowances for medical care

Employees receive a Medical Allowance during their employment for medical expenses. As a result, income tax can be saved on medical allowances. However, the employee will only receive this amount if medical bills are submitted as proof. A failure to submit medical bills will result in the employee receiving the allowance, which will be fully taxed. If the proof is provided, however, the allowance up to INR 15,000 is exempt from taxes. On the salary slip, it appears under earnings.

 Allowance for travel on leave

A company provides this coverage as a way to cover the cost of employee travel while on leave. It also covers the expenses of immediate family members of the employee. A proof of the journey is required to claim a deduction. The leave travel allowance tax exemption does not apply to any expenses incurred during the trip other than travel. The exemption is also only valid for two journeys within four calendar years. The salary slip shows it on the earnings side.

Salary allowance for special circumstances

It is normal for companies to offer employees a performance-based allowance in order to motivate them to work harder. This type of allowance is 100% taxable and appears on the earnings side of the salary statement. 

Tax deductions

There are three deductions on the salary slip: professional tax, TDS, and EPF.

Professional Tax

State governments levy a small professional tax on professionals earning income. There are only a few states that collect it, including Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamilnadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura, Jharkhand, Bihar, and Madhya Pradesh. Anyone who earns their living through a medium is also subject to the tax. The amount deductable from taxable income is deducted. On the salary slip, it appears under deductions as a few hundred rupees each month and is subject to gross tax.

Tax Deducted at Source

On behalf of the income tax department, the employer deducts this amount. By investing in tax-exempt investments like equity funds (ELSS), PPF, NPS, and tax-saving FDs, this amount can be reduced based on the employee’s gross tax slab. Investing in section 80C instruments of the Income Tax Act will boost your take-home salary since it appears on the deductions side of the salary slip. TDS returns can be claimed for mutual funds (ELSS) if investment proof is provided to the company with proof of investment.

Employee Provident Fund (EPF)

Employees contribute to a provident fund. This is covered by section 80C of the Income Tax Act. Provident funds are funds accumulated for the retirement period of employees. Employees’ Provident Fund Organisation administers them. In addition to 12% of the employee’s basic salary going toward EPF, the employer also contributes on behalf of the employees.

The provident fund does not receive all the contributions made by employees. Employees’ contributions are divided among 8.33% into the Employees’ Pension Scheme. The contribution for employees with salaries over INR 15,000 is INR 1,250. For employees with salaries below INR 15,000, 8.33% goes to the Employees’ Pension Scheme. EPF retains the balance. However, employees can opt-out of the EPF scheme (up to a limit) and invest in better-earning instruments like equity funds (ELSS). The salary slip shows the deduction for employee provident fund.

 

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