How to decode your monthly salary slip

The monthly salary that is credited into your bank account, is always less than what you signed up for in the employment contract. This is so because of the structure of your salary and the tax implications on it. There is no subterfuge here. These are clearly stated in your salary slip every month. Let's take a closer look at it.

The salary slip
It tells you your take-home salary and the deductions from the total salary in a particular month. Do not directly correlate monthly income shown in this slip with the cost-to-company (CTC) figure that you agreed to join your organisation for. Your CTC includes some variable components, like bonuses, which may appear in your salary slip only once or twice a year, depending on how your CTC is disbursed by your organisation.

A regular salary slip has two main components: earnings and deductions.

Earnings
The salary slip shows you the components of your monthly salary such as basic pay, house rent allowance (HRA) and any other allowances. It may not include reimbursements. Basic pay is the most important part of your salary slip. Your HRA and provident fund deductions are based on it. And, in most cases all of it is taxable. The HRA, too, could be partially taxable, based on factors like actual house rent paid. Special allowances-apart from conveyance, medical and leave travel-are fully taxable.

Deductions
This includes the amount deducted towards statutory provident fund, income tax, and professional tax, if applicable. The Employees' Provident Fund (EPF) contribution is usually 12% of the basic pay. This amount is tax exempt under section 80C of the income tax Act, and also earns an interest. Professional tax is applicable only in some states.

The tax deducted at source (TDS) as income tax depends on the exemptions and deductions would you have claimed for the year, as well as the tax slab you fall in. For individuals in higher tax slabs, TDS could be a significant amount, and can be reduced by investing in various instruments such as specific mutual funds or Public Provident Fund. Many organisations provide a summarised Form 16 with the salary slip, which summarises your income and deductions.

What the salary slip does not show
There could be entitlements that you get, which are not part of the CTC. These could be reimbursements for work-related travel, food, telephone bills and periodicals. All of these are tax exempt if backed by proper bills. These may not reflect in your salary slip.

In arrangement with HT Syndication | MINT

This article was originally published on October 13, 2016.