Your salary slip lists out the fixed part of your monthly take-home income. Here’s what you should know about the different components mentioned in the salary slip.
The foundation of the income, on which several other heads of income are based. On an average, this is 35-45% of the total cost to company (CTC). Basic salary is taxable, so do not keep it as more than 40% of the CTC otherwise the tax liability will shoot up.
On the other hand, if basic salary is very low, say around 25-30% of the CTC, then the individual loses out on the benefits that are linked to this head.
DA and CCA: Dearness allowance and city compensatory allowance are fully taxable and are usually clubbed with the special allowance.
House rent allowance
A crucial head, this can reduce the tax significantly. The HRA should be 40-50% of the basic salary because its exemption is linked to that. HRA is exempt from tax up to the least of the following three calculations:
a. HRA received
b. 50% of basic salary in metros and 40% in other areas
c. Rent paid minus 10% of basic salary
If HRA is lower than 40% of the basic, the employee loses out on the chance to reduce his tax. If it exceeds 50% of the basic (in a metro), it serves little purpose because the exemption is capped at 50%. HRA is taxable if the individual does not pay rent.
More pain than gain, this head adds to your tax burden without giving you any linked benefit. Widely used by companies because unlike basic salary, they don’t have to make commensurate contributions to the Provident Fund. The cold comfort is that the special allowance is usually not bigger than the basic salary. Special allowance is often treated as a remainder. Part of the CTC that cannot be allocated to any other salary head generally goes to the special allowance.
This is linked to the basic salary. A minimum 12% of the basic is deducted and put in the employee’s Provident Fund (PF) account. The employer makes a matching contribution to the PF account.
If your basic is high, so is your PF contribution. But that also means a low take-home salary. You need to strike a balance here. Remember, company’s contribution is part of your CTC too.
This is derived from your income, investments and certain expenses incurred during the year. The employer deducts tax on the basis of the individual’s projected income for the year and the declaration of his investment plans.
If the individual does not declare his investment plans under Section 80C, the employer will deduct a higher tax.
A more diverse salary structure could reduce your tax, but it raises your company’s cost of maintaining paperwork.
If a company gives a soft loan at a concessional rate of interest, it attracts the fringe benefit tax. Companies can pass on the FBT charged to them to the employees. When the loan amount is very low (less than Rs 20,000), then it is not considered a fringe benefit and no tax is applicable.