Salaried individuals receive pay periodically from their employer, mostly on a particular date. The total salary includes basic pay, inclusions, allowances, deductions, taxes, employer details, employee details, etc.
All these must be sent to the employee and the salary.
What is a salary slip?
The document which includes all such details is called a salary slip or pay slip. A salary slip is one of the most important documents for an employee.
Let us understand what its important components are:
Broad components are given below that form part of the income or earnings in the salary statement or the pay slip:
Basic Salary, Dearness Allowance, House Rent Allowance, Conveyance Allowance, Medical Allowance, Special Allowance, Professional tax, TDS (Tax Deducted at Source) and Employee Provident Fund
Let us now try and understand every component of a salary slip.
A salary or pay slip contains basic information like the company's name, employee's name, designation and the employee's code.
Salary's components primarily fall under income or Earnings and Deductions.
The income part of the salary slip has basic salary and allowances. The same is explained below.
It is the basic component of the salary. It constitutes 35-50 per cent of the salary. It forms the basis of other components of the salary. At junior levels, the basic tends to be high. As the employee grows, other allowances tend to be higher. Organisations tend to keep the basic component low so the allowance pay won't be topped. The salary is 100 per cent taxable in the hands of the employee. Basic is the first component on the earnings side of the salary slip.
It is paid to offset the impact of inflation on one's pay. It is usually 30-40 per cent of the basic pay. Dearness allowance is directly based on the cost of living. Hence it is different for different locations. For income tax, basic and DA are considered as pay. Therefore it is taxable. It appears on the earnings side of the pay slip right after the basic pay.
House Rent Allowance:
House Rent Allowance (HRA) is given to employees living in rented facilities. The HRA depends on the city of residence of the employee. HRA is 50 per cent of the basic pay for a metro city. It is 40 per cent of the basic pay for all other cities. Since housing rent allowance is an allowance, it is exempted from tax up to a specific limit, provided the employee pays the rent. It appears on the earnings side of the salary slip.
Conveyance Allowance is the amount an employer pays an employee to travel to and from work. It is an allowance. Hence is exempt from tax up to a specific limit. It appears on the earnings side of the salary slip. One can save income tax on conveyance allowance.
Medical Allowance is the amount an employer pays an employee for medical expenses during the term of the employment. One can save income tax on medical allowance. However, the employee only receives this amount on submitting medical bills as proof. If the employee fails to submit evidence of medical bills, they will receive the Allowance, but it will be fully taxed. It appears on the earnings side of the salary slip.
Leave Travel Allowance:
Employers give it to cover the cost of employee travel while on leave. It also includes the travel expenses of the employee's immediate family members. Proof of the journey is required to avail deduction subject to certain limits. Any expenses incurred during the trip apart from travel do not count towards the leave travel allowance tax exemption. The exemption applies only for two journeys undertaken in a block of four calendar years. It appears on the earnings side of the salary slip.
Special Allowance in Salary:
Special allowances include performance-based allowances. These are usually given to encourage employees to work better. Also, these allowances vary from company to company. Special allowances are 100 per cent taxable. It appears on the earnings side of the salary slip.
The deduction part of the salary slip has the professional tax, TDS and EPF. The same is explained below.
Professional tax is a small tax levied by state governments on earning professionals. It is payable only in a few states. Namely, Karnataka, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Orissa, Tripura, Jharkhand, Bihar, and Madhya Pradesh.
It is not only levied on professionals but also on those who earn a living through a medium. This amount is deducted from the taxable income. Also, it usually amounts to just a few hundred rupees each month and is subject to the gross tax slab. It appears on the deductions side of the salary slip.
Tax Deducted at Source (TDS):
It is the amount the employer deducts on behalf of the income tax department. It is based on the gross tax slab of the employee. One can reduce this by investing in tax-exempt investments like equity funds, equity-linked saving schemes, Public Provident Fund (PPF), National Pension Scheme (NPS) and tax-saving fixed deposits. It appears on the deductions side of the salary slip. Hence, investing in section 80C instruments of the Income Tax Act increases your take-home salary. One can invest in mutual funds (ELSS), submit investment proof to the company and claim TDS returns.
Employee Provident Fund (EPF):
It is the contribution of the employee to the provident fund. This qualifies for section 80C of the Income Tax Act. A Provident fund is the accumulation of funds for an employee's retirement period. The Employees' Provident Fund Organisation governs it. 12 per cent of the employee's basic salary goes towards EPF. The employer also makes a matching contribution on behalf of the employees for their retirement.
However, not all the contributions to Employee Provident Fund go to the provident fund. Of employees' contributions, 8.33 per cent goes to the Employees' Pension Scheme. The balance amount is retained in the EPF scheme.
However, employees can opt out of the EPF scheme (up to a limit) and invest in better-earning instruments like equity funds (ELSS). Employee Provident Fund appears on the deductions side of the salary slip.