GUIDES
GuidesMoney MattersA Guide: Salary Terms : You Should Know Before the Month Ends - PF, ESI, Gratuity, HRA
LAST EDITED BY ULFATH JOAD ON APRIL 25, 2025.
If asked 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 ever looked into the details of your payslip and wondered what terms like ‘dearness allowance’ or ‘HRA’ meant?
In case this sounds like you, you’re not alone. Many salaried professionals may struggle to figure out what complicated salary terms mean. But once you 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 learn some key salary terms you should know.
Also known as basic pay , this is the core component of your salary. It is the most fundamental aspect of your income. It makes up most of your salary. It also determines other parts of your paycheck, like your HRA, Provident Fund, gratuity, ESI, etc., 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.
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 employers offer include dearness allowance, house rent allowance, conveyance allowance, and even medical allowance. However, not all employers offer them. These allowances you receive will depend on the employer’s policy, the nature of your job, the location, and other factors.
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 of 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 ₹50,000 and DA is calculated at 50% of your basic salary, you will receive a dearness allowance of ₹25,000 each month.
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 exempt from tax. The deduction available for HRA under the Income Tax Act, 1961, is the least of the following —
It 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 to compensate the latter for any travel expenses they may incur during their employment. It also helps employees meet commuting costs between their homes and the workplace. Conveyance allowance is tax-free up to ₹1,600 per month or ₹19,200 per year.
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.
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.
ESI is a scheme that offers insurance coverage for workers in case of health issues, or medical treatment is needed. The scheme typically covers employees earning ₹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 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 and is typically offered at retirement. That said, not all private sector employers offer gratuity payouts.
Gross salary is the total salary 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.
Also known as the take-home salary, this is the monthly amount credited to your account. 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.
As you may have gathered from the term, the CTC refers to the total of all the expenses a company incurs to retain an employee. It includes the basic salary, allowances and other monetary benefits paid to the employee by the company.
By comprehending these salary terms, you can make informed decisions about your finances and better understand your take-home pay. Each component contributes to your overall income from the basic salary, allowances, and benefits to terms like Dearness Allowance, House Rent Allowance, Conveyance Allowance, and Leave Travel Allowance. It's also important to be aware of the tax implications and deductions associated with these salary terms. Additionally, long-term savings through schemes like Employee Provident Fund and insurance coverage through Employees' State Insurance provide financial security. While not all employers offer gratuity payouts, knowing about them can benefit your future plans.
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.
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.
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.
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.
Currently, the PF contribution from the employee and employer is 12% of their basic salary. The employee contribution is 1.75% of their salary, and the employer contribution is 4.75% of the employee's salary in ES!
DA stands for Dearness Allowance. This allowance is 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 ₹50,000 and if DA is calculated at 50% of your basic salary, you will receive a dearness allowance of ₹25,000 each month.
The main difference between DA and HRA is that HRA is applicable to employees both from the public and private sector, and DA is mostly applicable to employees from the private sector.
