It’s always a great joy when you land a job. The deal gets sweeter when you end up with a fat salary package. You are sent your offer letter that confirms your appointment along with the salary break-up.
You quickly glance through the break-up but don’t pay much heed because your overall cost to the company (CTC) is lucrative. A month passes and you get a text message notifying you that your hard-earned money has been credited to your bank account.
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But wait, that’s not what you expected! In fact, you are quite disappointed with your monthly take-home. You get your payslip and scratch your head to figure out why your big fat CTC now looks like peanuts. The numbers that seemed high now seem low and you have absolutely no idea on how the calculations were done.
Well, join the club! Reading payslips can be a pain if you don’t understand the calculations behind it. But do not worry. Here’s a little guide on how to read your salary statement, which will help you better understand why you get what you get at the end of the month.
Basic salary
The basic salary forms the largest portion of your monthly take-home. It is generally 30-50% of the total salary. However, there is no hard and fast rule to how much percentage this component should be. This component is important because it becomes the basis on which other components of your salary are calculated.
For instance, let us say in your new offer your CTC, i.e. the total cost-to-company, is ₹10 lakh. In such a deal, your basic salary could range from ₹3 lakh to ₹5 lakh annually. On a monthly basis, this comes down to roughly ₹25,000 to ₹42,000. You should always negotiate for a higher basic salary. Also, it is your basic salary that banks take into consideration before granting a loan.
Annual increments in your salary will also result in a smaller take-home unless a higher basic salary has been negotiated. Hence, it is important to ensure that your basic salary forms at least 40% of your overall CTC, if not more. This will help you accumulate a good gratuity, or ‘accrued benefit’ in the future.
House Rent Allowance
The House Rent Allowance (HRA), is the second largest part of your salary. The HRA is calculated on the basis of your salary and is generally 50% of the basic component. It is included in order to make the salary structure tax efficient. In the above example, if your basic salary is fixed at ₹25,000 per month, your HRA would be ₹12,500 per month.
However, one must remember that this amount is not completely exempted from tax. An individual can enjoy tax exemption only on any of the following three scenarios depending on which is the lowest of all:
· House rent paid by the employee in excess of 10% of his basic salary
· HRA received by the employer
· 50% of the basic salary if the employee lives in a metro city and 40% in the case of any other city.
Transport Allowance
Transport Allowance or conveyance allowance is a fixed component paid by the company to the employee for the cost incurred on travelling to the office. The government had raised this component to ₹1600 per month from ₹800 per month.
Medical Reimbursements
As the name suggests, this component is for the medical expenses incurred by an employee that is paid by the company at the end of the month. However, you need to produce bills in order to claim the amount. The highest ceiling for this component is ₹15,000 (as announced by the government) and anything above this amount is taxable. Some companies only allow you to claim this twice a year.
Leave travel allowance (LTA)
This is another benefit that only a few companies dole out for their employees. If you have this component, here’s what it means. Suppose you go on a holiday every year. Whatever expenses you incurred on your travel can be reimbursed by the company. But remember, this only includes your travel expenses and not your accommodation or any other expense incurred during the trip.
Another important thing to remember is that you can claim tax benefits on LTA only twice in four years. The important thing to note here is that since it’s a yearly benefit, the earlier in the year you avail it, it’s better. However, it’s inadvisable to treat this component as a monthly take-home income.
Special Allowance
This is the remaining part of the salary and is totally taxable. If your company offers tax saving options such as meal passes, it is advisable that you opt for them under this component. The balance amount, if any, is credited to your account as a part of your take-home income.
Variable Component
Most companies have what is called variable component, which is known as a bonus or performance-linked bonus. It is usually 10-15% of the overall CTC, thus reducing your fixed CTC component. It is totally taxable and paid either mid-year or annually. In most companies, a minimum of 10% of the total is the variable component.
However, try negotiating with the HR for a lesser variable component, primarily because it is paid once a year and if you quit the organization before the completion of the financial year, you lose out on this component. Besides, bonuses are generally performance-linked and hence you may not get the entire amount.
Now that we have explained the earnings, let’s move to the deductions in your salary slip.
Employee Provident Fund
This is generally the only deduction in the salary. It is primarily a retirement plan. A company can deduct up to 12% of the basic salary. In the example mentioned above, assuming that your employer contributes 12% of the salary to PF, your PF contribution every month will be 3,000, assuming the basic is Rs 25,000.
Gratuity
Some companies take a part of your basic salary and contribute it towards gratuity, which is mandatory for every company to maintain. An employee is eligible for gratuity only after completion of 5 years of service in the company.
Income tax
This is probably the most complicated part of the salary slip. Your tax is calculated on the final amount after deductions, on the basis of the tax slab you fall under. If your monthly income, after deductions, is ₹50,000, your income tax will be deducted on the basis of this amount. However, you can save on taxes by showing investments and tax-saving loans such as insurance, PPF and home or education loans.
Thus, when you join a new company and get your first pay slip, you must do three things –
1) Compare the components of the pay slip with those mentioned in your employment agreement.
2) Calculate the number of days that you have worked and the number of days you have been paid for.
3) Lastly, tally your tax deducted.
Once you do these, you will be able to master the art of reading payslips.
Alok Bansal is co-founder and CFO, Policybazaar.com. The views expressed here are his own.
