Whether you have just gotten your first job, or whether you’ve been a valuable employee for several years now, you may find it challenging to make sense of the salary components in your monthly payslip. If this sounds like something you’re going through, don’t you worry, because you’re not alone.
Fortunately, there’s some great news for you — understanding the components of your salary slip is extremely easy. All you need to do is spare a few minutes to take a deep dive into the salary structure in India. And before you know it, you’ll find that you’ve learned how to make sense of your salary structure.
If this sounds like something you want to do right away, you’re in luck. That’s because today, I’m going to take you through the key components of your salary slip and explain how to calculate your salary.
The typical salary structure in India consists of both direct and indirect components. Some of these may be fixed or constant, while others may be variable components in your salary.
Let’s go through the most common components of your pay structure, so you can understand your payslip better.
This is the first component that you will find in your salary breakup. As the name indicates, it is the basic pay that your employer pays you. Any other allowances and bonuses are offered in addition to this component. The basic pay makes up the most of your total salary, often accounting for around 35% to 50% of your monthly income.
Typically, your basic salary depends on various factors such as the following —
Various other salary components in your total income are also calculated as a percentage of your basic salary. So, this is one of the most important aspects of your pay. When you negotiate your salary with your existing employer or with a potential employer, aim to get as high a basic pay as possible. This way, all the other components of your pay structure, which depend on the basic salary, will also increase accordingly.
Things to note:
The basic pay is a fixed component of your salary slip. And it is fully taxable. So, if your basic pay is Rs. 40,000 per month, you will have to pay tax on 100% of this amount at the income tax slab rate applicable to you.
Allowances are monetary benefits that are paid out to employees over and above their basic salary. If you take a look at your pay slip, you’ll find various kinds of allowances. These allowances are generally paid to help employees meet the various costs they may incur in the course of employment.
Allowances may be partially or completely taxable, depending on the provisions of the Income Tax Act, 1961.
Do note that not all employers offer allowances. Whether your employer offers them or not and what kind of allowances they offer will depend on the policy in place, the nature of your job, the location of your workplace, and other different factors. That said, let’s check out the top allowances that are commonly a part of the salary structure in India.
Over time, inflation makes everything more expensive or ‘dear.’ To help employees combat the effect of inflation on their finances, employers offer a financial benefit known as the Dearness Allowance or DA, for short. This allowance is computed as a percentage of the basic salary. For instance, if your monthly basic salary is Rs. 1 lakh, and you are eligible to receive DA at 20% of your basic pay, you will earn Rs. 20,000 as Dearness Allowance each month.
Typically, only public sector employees in India receive DA as a part of their salary package. Private sector employees are not entitled to receive DA. That said, any employee who receives DA should know that it is a fully taxable component of the pay structure.
Over the course of your employment, you may have to relocate to a new city for your job. Else, you may even have to relocate within your existing city. These moves could mean that you would have to stay in rental accommodations since it is not feasible to purchase a house in every city you move to.
To compensate employees for their rental expenses, many employers offer a financial benefit known as the House Rent Allowance (HRA).
Unlike your basic pay and your DA, the HRA you receive may not be fully taxable. If you do not live in your own house, you are eligible for complete or partial deduction as per the Income Tax Act, 1961. The amount of deduction you can claim is the least of the following —
To understand this better, let’s take a small example with hypothetical figures. Say you reside in rental accommodation in Mumbai. And the particulars of your salary, HRA and other details are as follows.
In this case, the HRA exemption you can claim will be the least of the following three amounts:
Some employers also offer their employees an allowance that covers the cost of domestic travel within the country when the employee is on a holiday. This allowance — known as the Leave Travel Allowance or LTA — is paid only to compensate employees for actual trips taken, either for themselves or their dependent family.
LTA is a common salary component for employees in the private as well as the public sector. LTA is also eligible for tax exemption to the extent of the actual travel costs. Other expenses you may incur on your vacation, like sightseeing, hotel accommodation and food, are eligible for the exemption. Furthermore, you can claim LTA exemption for only 2 journeys in a block of 4 years.
Conveyance allowance, also known as transport allowance, is also a common salary component for many employees. Employers offer this allowance to help employees meet the cost of commuting to and from the workplace.
Conveyance allowance is exempt from tax to the extent of Rs. 1,600 per month or Rs. 19,200 per annum.
Medical allowance, as the name indicates, is to compensate employees for any medical costs they may incur during the year. It is typically fixed by the employer, and is not a variable component of your salary.
Medical allowance is also exempt from tax, but only to the extent of Rs. 15,000 per annum.
In addition to the allowances discussed above, there may also be other indirect elements that form a part of your pay slip. Some of the most common salary components in this category include the following —
This bonus is offered to employees for additional office work completed outside of normal working hours.
This is a fixed sum of money that is paid out to employees after they complete a year of service at the company.
These incentives are paid out to employees for their outstanding performance as a bonus. The amount of incentive paid is linked with the results of the performance.
Arrears are paid out in case of retrospective salary revisions. They are effectively the payments that should have been to the employee, if the revision had occurred earlier.
The corporation reimburses expenses incurred during business travel or food purchased during business meetings.
Gratuity is a lump sum payment that is made to employees who may be leaving the organisation for various reasons. Only individuals who have completed at least 5 years of service in the company are eligible for gratuity payments. Furthermore, the gratuity received by an employee on account of their retirement, superannuation, or termination is fully exempted from tax.
Up until now, we saw allowances or benefits paid out to employees as a part of their salary. Now, let’s move on to the deductions that commonly form a part of the salary structure in India.
Contribution to the Employee Provident Fund (EPF) is mandatory if you work in an organisation with 20 or more employees. Typically, EPF contributions to your account are made as follows —
This sum is deposited to your EPF account on a monthly basis, and by the time you retire, you would have built up a sizable corpus that can fund your post-retirement needs. The end goals of the Employee Provident Fund is to help private and public sector employees be financially secure after they have retired.
This is a state-specific tax that is levied on the income earned by salaried professionals. The amount of professional tax deducted will vary depending on the location of your workplace. However, it is limited to Rs. 2,500 annually across India.
TDS or tax deducted at source is essentially a part of the income tax that you need to pay the central government. To reduce the year-end tax burden for employees and to meet the obligations of paying advance tax, employers generally deduct tax at source at a specified percentage from the monthly income paid to their employees.
Mostly, the TDS rate is set at 10%. If your tax liability is higher, you may have to pay the additional taxes out of pocket. But if your tax liability is lower, you can claim a refund when you file your tax returns.
ESIC is short for Employees State Insurance Corporation, and as the name indicates, ESIC deductions are made to cover the need for insurance for employees. That said, ESIC is not a mandatory salary component for all employees. It is only applicable to employees whose gross salary is not more than Rs. 21,000. And only companies with 10 or more employees in this salary bracket are expected to deduct ESIC.
Well, this sums up the most fundamental fixed and variable components in your salary. Now that we have this covered, it is essential to understand how you can go about calculating your salary. In this context, we have three key metrics that you should be aware of —
Your gross salary is essentially the sum of all the direct and indirect monetary benefits and earnings you receive. It is the sum of your basic salary and various allowances, and it is calculated before making any deductions. The formula shown below can help you compute your gross salary.
Gross Salary = Basic Salary + DA + HRA + Other Allowances
Your net salary is also known as the take-home salary. In other words, it is the amount of your monthly income that is actually credited to your bank account each month. This is your gross salary after it has been adjusted for any deductions or taxes. The formula shown below can help you compute your net salary.
Net Salary = Gross Salary – All deductions like professional tax, income tax, Employer’s Provident Fund and more
The CTC is the total expenditure that a company invests in an employee. It is typically what makes up the salary package, and companies use this metric as the benchmark when you are applying for a new role. The formula shown below can help you compute your CTC.
CTC = Gross Salary +PF + Gratuity + Other Indirect Benefits
Well, this is how you calculate your salary. And with this, we come to the end of decoding the key components in your salary package. Armed with this information, you now know how to make sense of your salary structure. And you can negotiate your next pay better if you are switching jobs.
Your salary can be broken down into fixed and variable components or into direct and indirect components. Alternatively, you can also break down a salary package into the gross salary and the net salary.
The gross salary includes all the monetary benefits and allowances you receive from your employer. The salary components included in the gross salary include basic salary, arrears, overtime pay, and all allowances received.
The salary that you receive from your employer is not just a lump sum amount, although it may appear so at first glance. Every employee’s salary can be broken down into various elements or salary components. Some of the most common components of your salary slip include the basic pay, DA, HRA, other allowances, EPF and other tax deductions.
The variable component of your CTC depends on the nature of your employment and the terms and conditions of your employer. It is not fixed, as the name clearly indicates.
Variable pay is typically offered over and above fixed pay. So, while fixed pay offers a great deal of stability in income, variable pay can further increase the amount you earn each month. In other words, fixed pay offers financial stability, while variable pay helps achieve financial freedom. So, both salary components are essential.
In India, a typical salary structure contains a Net Salary, a Gross Salary, CTC, Fixed Pay and Variable Pay, Allowances, Bonuses, Gratuity and more.
No, the CTC doesn't include TDS. TDS is Tax Deducted at Source and is deducted at time of the salary payment to the employee. There isn't a threshold limit for TDS and it is usually 10% of the salary amount.
No PF isn't a part of your fixed salary, instead PF is usually a part of your basic salary. Your Fixed Salary usually contains Dearness Allowance, HRA and other allowances.
