At the beginning or end of each month, employees get their salaries for their services rendered to the organisation by employers. A salary slip has various components such as your basic salary, CTC, tax deductions, insurance, provident fund, etc.
There are still many employees who do not understand everything that is mentioned in a salary slip. Moreover, many HR or payroll professionals – who are responsible for issuing the salary slips – are not too familiar with how a salary should be structured.
What Is A Salary Breakup?
Employees’ salaries are dissected into different components to analyse their CTC (Cost To Company) or gross salary. This is known as salary breakup.
The gross salary and in-hand salary are not the same in the majority of the companies. For example, let’s say your CTC is ₹20,000 per month. However, the actual amount you get to take home every month is ₹12,000. This will include your basic salary and other allowances such as a house or travel allowance, among others. Now, what about the remaining ₹8000? Well, that would be the amount deducted from your CTC for purposes such as professional tax or provident fund (PF).
Components Of Salary BreakUp
You need to bear in mind that not all salary slips follow the same structure. It depends on the company. All in all, a salary slip must have the following details:
- Name of the company
- Company’s logo
- Name of the employee
- Employee’s designation and department
- Employee’s ID number
- Employee’s PAN/Aadhaar number
- Employee’s bank account number
- Employee’s Provident Fund account number
- Number of leaves taken by the employee
- Effective workdays of the employee
- UAN (Universal Account Number)
- Earnings and deductions
- Gross and Net pay
Cost To Company (CTC)
The monthly or annual amount of money that employers spend on an employee is the CTC. This includes the basic salary, allowances such as House Rent Allowance (HRA), Conveyance Allowance, Reimbursements, bonus, etc., and deductions such as Tax Deductible at Source (TDS), Provident Fund (PF) and Professional Tax.
To calculate your CTC, you can use the formula given below:
CTC = Gross Salary + EPF + Gratuity + Others
Basic Salary
The basic salary is a fixed salary, which means that it is the base amount of an employee’s salary before any dedication or addition.
The amount of an employee’s basic salary, which is generally made up of about 35% to 50% of the total salary, depends on the designation, skills, experience, educational qualification, as well as the company or industry.
Gross Salary
The gross salary is the total amount received by the employee monthly or yearly after adding the basic salary, allowances such as medical or conveyance allowance, bonus, incentives, overtime pay, and other differentials. Here, deductions and taxes are not included.
The formula given below can be used to calculate gross salary:
Gross Salary = Basic Salary + HRA + Other Allowances
Net Salary
Also known as in-hand salary, net salary is the amount an employee receives after adding allowances, incentives, bonuses, etc. and the deducting Tax Deductible at Source (TDS) and Provident Fund (PF) Or Employer Provident fund (EPF), and other deductions as per the company policy. This is the actual amount that the employee receives in his name account or, in some cases, his hands.
The formula below can be used to calculate net salary or in-hand salary:
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employee’s Provident Fund – Professional Tax
Allowances
Allowances depend on the benefits and perks that the company offers its employees, such as travel allowance, medical allowance, house rent allowance, etc. Let’s take a closer look at some of them.
House Rent Allowance (HRA)
House Rent Allowance (HRA) is an addition to the basic salary given by the company for an employee’s rent accommodations. Not all employees are eligible for this allowance.
Leave travel allowance (LTA)
Leave travel allowance (LTA) is an expense given to employees who are travelling domestically while on leave. However, this only covers the travel cost and not accommodations.
Medical Allowance
Many companies give medical allowance to their employees to cover their medical bills.
Dearness Allowance
Dearness allowance is often only offered to a government or public sector employee. This allowance helps employees in covering the escalating cost of living brought on by the effects of inflation.
Conveyance Allowance
While many companies provide cab services for their employees, some give their employees a conveyance allowance to cover the employee’s travel costs to and from work.
Tiffin/Meals Allowance
Some employers provide tiffin or meal allowance to cover their employees’ food expenses.
Variable Allowance
Variable allowances are given to employees as a bonus or incentive for their satisfactory/excellent performance or when they reach a goal set for them.
Special allowance
Special allowance is given by employers to their employees as a mode of encouragement.
Other Allowance
Other allowances can be reimbursement, entertainment allowance, city compensatory allowance, overtime allowance, etc.
Deductions
Provident Fund (PF), Professional Tax, Tax Deductible at Source (TDS) and insurances are what come under deductions in a salary breakup
Provident Fund (PF) Or Employer Provident fund (EPF)
PF or EPF is the accumulation of funds for an employee’s retirement period. Each month a certain amount is deducted from the employee’s CTC. The employer then deposits this amount to the employee’s PF account. If the employee’s basic salary is less than ₹15,000, 125 will be set aside. And if the employee’s salary exceeds ₹15,000, then either the employer contributes 12% of ₹15,000 or sets aside 12% from the employee’s basic salary. For employees in Indian companies, it is mandatory to contribute to the provident fund. This contribution and its amount will be reflected on your salary slip.
Professional Tax
Some state governments charge working individuals a professional tax, and the maximum amount can be ₹2,500 per annum. The amount deducted depends on the employee’s salary per month as well as the state. Delhi, Dadra & Nagar Haveli, Andaman & Nicobar, Himachal Pradesh, Jammu & Kashmir, Nagaland, Uttar Pradesh, Arunachal Pradesh, Punjab, Rajasthan, Lakshadweep, Chandigarh, Daman & Diu, Haryana and Goa are the states where union territories where professional tax is not charged.
Income Tax
Income tax is levied on a person’s annual income. The rate deducted varies depending on the taxpayers and their income type.
Tax Deductible at Source (TDS)
TDS is the amount calculated and deducted by the employer for their employees on behalf of the Income Tax department. In most companies, the employer gives Form 16/16A to their employees. This certificate helps employees in understanding the tax deduction breakup. The amount of tax deducted depends on the employee’s annual income.
Insurances
Insurance can include life insurance and health insurance, which are provided by many companies. A certain amount is deducted every month from the employee’s monthly salary by the employer.
Gratuity
Under The Payment of Gratuity Act, 1972, when an employee leaves the company, he/she is to receive a one-time gratuity. This applies to government and public sector employees and some in the private sector. Fifteen days’ wages of the employee’s CTC will be deducted each year by the employer. However, the employee can receive this bonus only after five years.
Public Provident Fund (PPF)
While PF is a mandatory contribution, PPF is a voluntary contribution. The person who wants to contribute will have to take care of it himself without the employer’s involvement. The amount contributed will not be reflected in their salary slip. But in cases where the payer wants to utilise it for tax-paying purposes, they can refer to Form 16 as it will be shown there. One of the reasons employees apply for PPF is for tax-paying issues, while the other is for long-running investment purposes. This provident fund provides 7.6 per cent per annum. The contribution as wee as the maturity amount is free of tax.
Form 16
Form 16 is given to the employee by the employer in which the details of the employee’s earned salary and tax deductions are mentioned. This document can act as proof of a person’s tax and income paid to the government to file an Income tax return every FY.
Process To Calculate Your Take-Home Salary
Take-home salary is also known as in-hand salary and net salary. Here, we have provided some of the easiest steps to calculate it.
To calculator the take-home salary, you have to subtract the Income Tax, Provident Fund (PF), and Professional Tax from the Gross Salary.
Step 1 – Calculate the gross salary
Gross Salary = CTC – (EPF + Gratuity)
Step 2: Calculate Taxable Income
Taxable Income = Income (Gross Salary + Other Income) – Deductions
To find out the part of your taxable income, subtract allowances (LTA Conveyance Allowance, HRA), medical bills, professional tax, medical insurance, tax-saving investments if any and other deductions from the gross salary.
How to calculate income:
To find out income tax, you should include income from all sources, which are:
- Salary (salary paid by your employer)
- House property (rental income or interest paid on home loan)
- Income from any other profession/business
- Capital gains (income from sale purchase of shares/house)
- Other sources (saving account interest income, interest income from bonds, fixed deposit interest income)
Deductions
HRA
House Rent Allowance, also known as HRA, is not completely limited by the tax. HRA, which you can declare is the lowest of the following:
- The total amount attained as the HRA from the employer in the financial year
- Accurate rent paid in the year – 10% of the basic salary in the year
- 50% of the annual basic salary if staying in a metro city or 40% of the annual basic salary if staying in a non-metro city
Standard Deduction
A standard deduction of INR 50,000 (annually) is introduced in the Budget 2019. Initially, there was a transport allowance of a maximum of INR 19,200 (annually) and a Medical allowance of a Maximum of INR 15,000 (annually), which are no longer relevant.
LTA
Leave Travel Cost can be claimed for tax released under Section 10(5) twice in a structure of four years. It only includes domestic travel, provided on the submission of actual bills.
However, remember that some components of the salary, such as telephone bill reimbursement, medical reimbursements, etc., are spared from the tax deduction.
Generally, deductions are distributed into the following categories:
| Section | Nature | Limit |
|---|---|---|
| 80C | Basic deductions from the total income | 1,50,000 |
| 80 TTA | Interest from deposits | Rs. 10,000 on interest, available to an individual and HUF. A deduction is permitted on interest earned from a savings account in a bank |
| 80 G | Donations to charity | 50% of the donation is deducted from the taxable income. Nonetheless, if the amount is more than 10% of the total gross income, the quantity will be disregarded |
| 80 E | Educational loan | The deduction is allowed on the total EMI part, which has no limit |
| 80 EE | Home loan interest | Enabled on interest paid on a home loan that is up to a maximum of Rs 50,000 per financial year |
| 80 D | Medical insurance premium | For the self and family – Rs 25,000 For the self and family and parents – Rs 55,000 For self and family and senior citizen parents – Rs 80,000 |
Step 3: Calculate Income Tax
When you get your taxable income, you can easily determine income tax by referring to the income-tax slab and rates given below:
Tax slab
The income tax rate is imposed on a slab system under which individuals pay taxes at different rates reflecting their income slab.
The imposed income tax slabs are amended annually during the budget, considering the individual taxpayers.
As per the budget announcement for the Fiscal Year 2019-20, the tax slab for individual Indian men and women residents below 60 years of age is as follows:
| Net Income | Income Tax | Health and Education Cess |
|---|---|---|
| Up to Rs. 5 Lac | Nil | Nil |
| Rs. 5,00,000 – Rs. 10,00,000 | Rs. 12,500 + 20% on income above 5 lac | 4% of income tax |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% on income above 10 lac | 4% of income tax |
*Surcharge @10% will be imposed for taxable income between Rs. 50 lac to Rs. 1 crore and @15% for taxable income above Rs. 1 crore.
However, with the new budget announced on February 2, 2020, taxpayers can select between the current and new tax schemes.
Individual taxpayers have a choice to choose between:
- The current tax scheme with existing income tax deductions and exemptions
- The new income tax scheme with lower tax rates and fewer exemptions
The new tax scheme suggested in the Budget 2020-21 offers slashed income tax rates to lower the amount of tax paid, at the same time eliminating certain deductions and exemptions.
Based on the amended tax scheme, the tax slab for individuals below 60 years of age is like this:
| Income Tax Slab | Tax Rate |
|---|---|
| Up to Rs 2.5 Lac | Nil |
| Rs 2.5 Lac to Rs 5 Lac | 5% (Rs 12,500 tax reba5te per section 87A) |
| Rs 5 Lac to Rs 7.5 Lac | 10% |
| Rs 7.5 Lac to Rs 10 Lac | 15% |
| Rs 10 Lac to Rs 12.5 Lac | 20% |
| Rs 12.5 Lac to Rs 15 Lac | 25% |
| Rs 15 Lac and above | 30% |
The amount of tax will depend on the 4% education and health cess.
An individual taxpayer choosing the new tax scheme will have to let go of the following deductions and exemptions:
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- Relocation allowance
- Professional Tax
- Housing loan interest (Section 24)
- Education allowance
- Helper allowance
- Special allowances [Section 10 (14)]
- Standard deductions
- Chapter VI-A deduction (Except section 80CCD(2) and 80JJA)
- Conveyance
- Daily expenses during the employment term
Calculate accurate in-hand salary with the help of our free take-home salary calculator.
Step 4: Calculating Net Salary
Net Salary = Basic Salary + Actual HRA + Special Allowance – Income Tax – Employer’s PF Contribution (EPF)
We are going to take an example to demonstrate how to calculate take-home salary:
Example of Calculate take-home salary
Let’s take an example to understand how to calculate take-home salary:
Karan’s CTC is Rs. 16,00,000. Other salary components of her salary structure are mentioned below:
| SALARY COMPONENTS | AMOUNT (ANNUAL) | AMOUNT (MONTHLY) |
|---|---|---|
| CTC | 16,00,000 | – |
| Basic | 6,40,000 | 53,332 |
| HRA | 3,20,000 | 26,666 |
| EPF | 21,600 | 1,800 |
| Sec 80C Investment | 1,00,000 | 8,333 |
| Leave Travel Allowance | 20,000 | 1,666 |
| Special Allowance | 5,75,324 | 47,943 |
| Gratuity | 23,076 | 1,923 |
| Professional Tax | 2400 | 200 |
Note:
*This is up to Karan to decide how much she wants to invest and claim under section 80C. The maximum deduction possible is 1,50,000. EPF amount also comes under section 80C.
We have assumed that Karan pays INR 30,000 per month as her rent.
DA is assumed to be zero because Karan is a private sector employee.
Step 1: Calculating gross salary
Gross salary= 16,00,000 – (21,600 + 23,076)
Gross Salary = INR 15,55,324
Step 2: Calculating taxable income
First, calculate the HRA deduction that you can claim:
HRA that you can claim
= Minimum (3,20,000 , 3,60,000 – 10% of 6,40,000, 50% of 6,40,000)
= Minimum (3,20,000, 2,96,000, 3,20,000)
= 2,96,000
Taxable Income = 15,55,324 – 1,000,00 – 50,000 – 2,96,000 – 2,400
Taxable Income = 11,06,924
Step 3: Calculate income tax
Based on the slab rates announced in the FY 2019-20:
Income Tax = 112500 + 30% of 1,06,924
Income Tax = 1,87,347
Cess = 4% of Income Tax
Net Tax = 1,87,347 + 7494= 1,94,841
Step 4: Calculating in-hand/take-home salary
Take Home Salary = 15,55,324 – (1,94,841 + 2,400)
Take Home Salary (Annual) = INR 13,58,540
Take Home Salary (Monthly) = INR 1,13,212
Salary Breakup FAQs
Q1. What is a salary slip?
Ans: A salary slip, also known as a payslip, is a document containing an employee’s salary details, including basic pay, bonuses, deductions, etc., given to the employee by the employer each month. The recipients are either given hard or soft copies and sometimes both.
Q2. What is gratuity, and how can I calculate it?
Ans: Under The Payment of Gratuity Act, 1972, when an employee leaves the company, they are to receive a one-time gratuity. Fifteen days’ wages of the employee’s CTC will be deducted each year by the employer. However, the employee can receive this bonus only after five years. In case of the employee’s death or disability caused by an accident or illness, the gratuity must be given to him, regardless of the number of years.
To calculate gratuity, use the formula below:
Gratuity = [ (Basic salary per month + D.A) x 15 days x Number of years of service ] / 26
Q3. Differentiate between CTC and in-hand salary.
Ans: CTC is the monthly or annual amount of money that employers spend on an employee, including the employee’s basic salary, allowances such as Medical Allowance, Leave travel allowance (LTA), Reimbursements, Conveyance Allowance, bonus, etc, and deductions such as Tax Deductible at Source (TDS), Gratuity, Provident Fund (PF) and Professional Tax.
In-hand salary is the amount an employee receives after adding allowances, incentives, bonuses, etc. and the deducting Tax Deductible at Source (TDS) and Provident Fund (PF) Or Employer Provident fund (EPF), and other deductions as per the company policy.
Q4. Why is Form 16/16A important?
Both Form 16 and 16A are important as these certificates allow employees and employers to understand detailed transactions TDS / TCS between the deductee and the deductor.
Q5. What are the 2 types of salary structures?
In India, employers follow two types of salary structures:
- Bottom-Up: In this type of salary structure, employers accumulate the employee’s total gross salary and then divide the components.
- Top-Up: In this type of salary structure, employers mention the different components of the salary and then add up the total gross salary.
Q6. What is the difference between a Financial Year and an Assessment Year?
A Financial Year (FY) starts on the 1st of April of every year and ends on the 31st of March the next year. It is a duration known for accounting and taxing purposes. For those who want to file their Income Tax returns, the FY would be the year before. For instance, if you want to file your IT return in 2022, the FY would be 2021-2022.
An Assessment Year (AY) is the year succeeding the FY. It is when people file for their Income Tax Returns. For instance, if you earned your income in FY 2021-2022, it will become taxable in 2022-2023.
The table below shows examples of Income Year, Financial Year and Assessment Year.
| Income Year | Financial Year | Assessment Year |
|---|---|---|
| 2020-2021 | 2020-2021 | 2021-2022 |
| 2022-2023 | 2022-2023 | 2023-2024 |
Understanding the breakup of a salary slip will help you greatly in your professional life. We hope this article helps you in understanding the components of a salary breakup.
We shall leave you here with our best wishes!
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