My friend has finished engineering and joined a company as a software developer a few weeks back. She had got her first salary and asked my help to understand her salary slip since she did n't have much idea about finance. I had faced the same situation when I started my first job and I thought if I share it as a blog post it will be useful for many people.
Here are the common components of salary slip in most companies:
Basic Salary - Basic salary is the fixed part of your compensation and it is fully taxable. It is the base criteria used for calculating many employee benefits like E.P.F and gratuity.
House Rent Allowance (HRA) - HRA is the amount paid by the company to meet your expenses for renting a house. Usually it is 50 percent of the basic salary. Certain percentage of HRA is exempted from tax if you produce rental receipts.
For HRA, least of the following will be exempted from tax:
- HRA received
- 50% of basic (40% for non-metros)
- Rent paid in excess of 10% of basic
Conveyance Allowance - Conveyance allowance is the money paid to meet your expenses for commuting to office.
In India, conveyance allowance up to 9600 per year (800 per month) is not taxable.
Medical reimbursement - Medical reimbursement is the amount paid to meet your medical expenses. Medical reimbursement for up to 15000 per year (1250 per month) is not taxable in India. You have to submit bills at the end of the financial year or per quarter according to your company policy to get tax exemption.
LTA (Leave Travel Allowance)- LTA is the allowance paid by the company when you travel with your family on vacation. The travel expenses are exempted from tax if you provide bills. It can be claimed only twice in a block of 4 years.
Other Allowance or Flexible Allowance - Any other allowance that is not part of the above allowances. Some companies include medical and LTA also as part of the other allowance.
Here are the common deductions:
E.P.F - If your company is providing E.P.F benefit, 12 percent of basic salary is deducted as E.P.F contribution. It may not be applicable for many small companies where employee strength is less.
For more information about E.P.F, see my blog post Understanding EPF
Professional tax - Professional tax is the tax levied by state governments and the maximum limit is 2500 per year (208 per month)
Income tax - Income tax will be deducted according to the salary you are getting and it is levied by central government. it varies according to the Income tax slabs government fixes for each financial year.
Income in rupees and tax slabs for the financial year 2013-2014 for general tax payers and woman:
- 0 to 2,00,000 - No tax
- 2,00,001 to 5,00,000 - 10%
- 5,00,001 to 10,00,000 - 20%
- Above 10,00,000 - 30%
Your take home salary will be the sum of all this components less deductions. Suppose your annual package is 3,00000 per year.
You may think you will get 3,00000/12 = 25000 as your monthly take home salary. But in reality, your take home monthly salary will be your basic salary + HRA + conveyance allowance + medical+ L.T.A (If applicable)- deductions(Income tax + EPF+ Professional tax)