Excited to see those figures in your salary slip but confused why the credited amount does not match? Well, there is a difference between your take-home/ net and gross salary and the CTC (Cost to Company). If you are puzzled by these terms, then keep reading this blog as we break down each component on your salary slip and explain what it means for you. You may not need documentation like your salary slip for an instant loan at EarlySalary, but you still ought to know the specifics of your compensation, right?
Before that, let’s understand the difference between CTC and Take-Home salary. Your CTC is inclusive of your fixed and variable pay. It includes:
- House Rent Allowance (HRA),
- Provident Fund (PF),
- Medical Insurance,
- subsidized loans,
- free meals or meal coupons, such as Sodexo and
- Other allowances added to the basic salary.
All these elements when combined together constitute Cost to Company. Your take-home salary is income after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Components on Your Salary Slip
Your salary slip has information like company name, employee name, designation and employee code, etc. The salary components can be classified into three benefits: direct benefits, indirect benefits, and savings contributions. Direct benefits include Basic Salary, DA, conveyance allowance, HRA, medical allowance, LTA, bonus, and other special allowances. Further, the salary components may either fall in the Income/Earnings and Deductions category.
Your CTC is a summation of Direct Benefits, Indirect Benefits, and Savings Contributions. Gross salary includes indirect benefits such as employee provident fund (EPF) and gratuity. It also includes bonuses, overtime pay, holiday pay, and other differentials. To put it simply, this is the amount paid before tax or other deductions.
EPF is an employee-benefit scheme prescribed by the Ministry of Labour. Your employer is mandated to contribute at least 12% of your salary towards EPF. This amount can be withdrawn fully at the time of retirement or when you attain the age of 55 years. Gratuity is a percentage of the basic salary and generally amounts to 4.81% of your basic salary. EPF, gratuity, and superannuation benefits are savings contributions.
Now let’s delve deeper into the salary break-down:
- Basic Salary
The basic salary is the fixed component which will not vary unless you get a performance appraisal. This fixed amount is the common denominator as a percentage of which other variables are calculated. This amount will always be part of your in-hand salary and usually comprises about 35% to 40% of the total.
As part of your salary structure, either all or some of your allowances are given to help you take care of your basic needs. These include:
- House Rent Allowance (HRA)
HRA is part of CTC and also comes with tax benefits up to a specific limit. Your tax rebate would be the minimum of the following:
- Annual Rent paid minus ten percent of the Basic and Dearness Allowance pay
- Actual HRA received
- If you are located in Mumbai, Kolkata, Chennai, Delhi then 50% of (Basic + DA) and in case the location of other cities then 40% of ((Basic + DA) in case.
- Leave Travel Allowance (LTA)
This is another salary component that is tax-exempted upto a limit. This allowance is to cover your and your immediate family’s travel expenses when you travel anywhere in India. Note that LTA pays only for the travel allowance and not other expenditures on food, stay, etc. Remember to keep proof of the journey to avail tax deduction subject to specific limits.
- Dearness Allowance (DA)
As inflation changes, your salary is also adjusted to help you keep up with the rising price levels. Dearness Allowances are a cost of living adjustment.
Bonus is paid once or twice a year after performance appraisal and is a fully taxable amount.
The bottom line is that your salary slip isn’t as complicated as it is made out to be. It is important to choose smartly from competing job offers, review each component to optimize for tax liability, your credit limit, and eligibility.
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