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Salary Terms : You Should Know Before the Month Ends - PF, ESI, Gratuity, HRA

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Salary Terms : You Should Know Before the Month Ends - PF, ESI, Gratuity, HRA

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If I asked you to define the term ‘salary,’ you’ll no doubt have an answer ready promptly. After all, everybody knows what the term means. It’s the monthly compensation you earn from your employer. But if I looked into the details of your payslip, saw your salary breakup, and asked you what terms like ‘dearness allowance’ or ‘HRA’ mean, you may (or may not) be so sure of the answers. 

In case this sounds like you, you’re not alone. Many salaried professionals may find it challenging to figure out what complicated salary terms mean. But once understand the finer details, you’ll be surprised at how easy and simple it is. So, without further delay, let’s dive right in and get to know some key salary terms you should know.

Basic salary 

Also known as basic pay, this is the core component of your salary. It is the most fundamental aspect of your pay and makes up most of the salary you earn. It also determines various other parts of your salary like your HRA, Provident Fund, gratuity, ESI, etc, which are all calculated as a percentage of the basic salary. 

The basic pay is fixed by your employer when you are first hired. Any increment or pay hike you receive throughout your employment causes this salary component to increase. Consequently, the other components that depend on basic pay also rise accordingly.

Allowances

Employers offer various allowances over and above the basic pay to employees. These allowances are typically provided for specific purposes or costs. They make it easier for you to perform the duties of your employment, and they are generally given to compensate you for any financial expenses you may incur on account of your job. 

Some of the most common kinds of allowances that employers offer include dearness allowance, house rent allowance, conveyance allowance, and even medical allowance. However, not all employers offer them. These allowances that you receive will depend on the employer’s policy, the nature of your job, the location, and other factors.

Dearness Allowance (DA)

Dearness allowance or DA is a kind of allowance paid out by the government to employees in the public sector. This allowance is offered to help compensate for the rising prices and costs resulting from inflation. That said, private sector employees in India are not entitled to receive DA as a part of their salary. 

Dearness allowance is typically calculated as a percentage of the basic salary. For example, if your monthly basic pay is Rs. 50,000 and if DA is calculated at 50% of your basic salary, you will receive a dearness allowance of Rs. 25,000 each month.

House Rent Allowance (HRA)

It is not uncommon for employees to shift to a new city on account of their employment. Such employees may have to rent a house in the new city and bear the extra cost of rental expenses. HRA or house rent allowance is a benefit paid to employees to help meet the cost of their home rent. Even employees who have not relocated, but live in rented accommodations, can benefit from the HRA received.

While the basic salary and the dearness allowance are fully taxable, HRA may be partially or totally exempt from tax. The deduction available for HRA under the Income Tax Act, 1961, is the least of the following —

  • Actual HRA received
  • 50% of (basic salary + DA) if you live in a metro city
  • 40% of (basic salary + DA) if you live in a non-metro city
  • Actual rent paid minus 10% of (basic salary + DA)

Conveyance Allowance

This is another salary term that you may come across frequently. As you may have guessed, it is a benefit paid by employers to their employees in order to compensate the latter for any travel expenses they may incur during the course of employment. It also helps employees meet the cost of commuting between their homes and the workplace.

Conveyance allowance is tax-free up to Rs. 1,600 per month or Rs. 19,200 per year.

Leave Travel Allowance 

Also known as Leave Travel Concession (LTC), Leave Travel Allowance (LTA) is another salary term you need to be familiar with. It may not be a component in every employee’s salary, but you need to keep an eye out for this allowance if your employer offers it. LTA is offered to employees to cover the cost of travel when they are on leave from work. LTA is only applicable for travel within India, and it does not cover the costs associated with international travel.

Employee Provident Fund (EPF) 

Known also as just Provident Fund or PF, this is a component of the salary that goes towards your long-term savings. Both you and your employer should each contribute 12% of your basic salary towards your PF account.

You can withdraw your PF corpus when you attain the age of retirement. This way, you have a sizable sum to meet your financial needs after you’ve retired. Partial withdrawal from your PF may also be allowed under certain scenarios.

Employees’ State Insurance (ESI) 

ESI is a scheme that offers insurance coverage for workers in case of any health issues or if medical treatment is needed. The scheme typically covers employees earning Rs. 21,000 or lower per month. So, if you earn more than this amount, you may not have ESI as a part of your salary terms. 

Gratuity

Gratuity is not a part of your monthly salary terms. Rather, it is paid out to by an employer to an employee who leaves the organisation after at least 5 years of continuous service. Gratuity is paid as a lump sum amount, and it is typically offered at retirement. That said, not all private sector employers offer gratuity payouts.

Gross salary

Gross salary is the total salary that you earn before accounting for taxes and other deductions. It includes all the allowances, bonuses and other benefits you receive as a part of your salary package. 

Net salary

Also known as the take-home salary, this is the amount that is actually credited to your account each month. In other words, it is the net of all the deductions from your gross salary. Each month, the net salary is what you have available to spend freely.

Cost to Company (CTC)

As you may have gathered from the term itself, the CTC refers to the sum total of all the expenses that a company incurs to retain an employee. This includes the basic salary, allowances and other monetary benefits paid to the employee by the company.

Conclusion

So, there you have it. This should give you a fair idea of what the basic salary terms mean. You can now do more than just define the term ‘salary.’ You can understand your pay breakup better, and you can even negotiate your salary more smartly since you know what each component means. 

Frequently Asked Questions (FAQs)

How do you name a salary range?

You can name a salary range based on your previous CTC or the industry average. While negotiating salary, the terms and conditions depend on what the hiring party is willing to pay, per their budget.

What are the types of salary?

You have the gross salary, which is the total pay before accounting for taxes and other deductions. And then, you have the net salary, which is the gross salary adjusted for taxes and other deductions.

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