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The joy of money being credited to your account after a month of hard work is incomparable! But, when you look at the figure, slight disappointment strikes. You find your employee salary slip to confirm the same but end up in confusion. After all, you were promised a handsome CTC when you joined the company. However, the amount you received looks smaller. Plus, the payslip is difficult to comprehend. Does this sound familiar to you? If you are a salaried individual, then you might relate to it.
Salary slips are a common aspect of every salaried employee’s life. It is a document that is sent to you every month by your employer once they make the monthly salary payment. The slip showcases the various components of your salary and how it is calculated. The salary slip format, including the terms like gross salary, HRA, TDS, etc., mentioned on it, can be perplexing. But, understanding your salary slip is crucial.
It not only gives you an insight into your payment structure and employee benefits but also helps you negotiate while switching jobs. Most importantly, the slip helps you during the filing season to save taxes. Before moving on to decoding salary slips, you need to get your basics cleared.
Cost to company or CTC is your annual pay that involves everything from contributions to the provident fund to conveyance, while your gross salary is your total monthly income before any deductions. What you get in your account after relevant deductions is your net salary. Your salary is divided into earnings, exemptions or benefits, and deductions. And, your online salary slip is the reflection of the same. Although the CTC structure differs from company to company, here are some common elements of a payslip.
Explaining Components of Salary Slips
- Basic Salary
One of the major portions of your employee salary slip, Basic Salary is the monthly income that you take home. The basic salary is a fixed amount that constitutes 30% to 50% of your CTC. It differs from organisation to organisation. For instance, if your CTC is Rs. 8 Lakh per annum, then your basic salary can be anywhere from Rs. 2.4 Lakh to Rs. 4 Lakh per annum depending on your company’s policy.
It is an essential part of your salary slip as many other components like HRA or EPF are based on this. It is always beneficial to have a higher amount of basic salary, at least 40% of your CTC, to ensure you get a better net take-home in case of increment. Moreover, it also helps accumulate a substantial amount of futuristic benefits like a gratuity.
- House Rent Allowance
Always wondered what that HRA on your salary slips is? Short for house rent allowance, HRA makes the second largest portion of your salary. It is the allowance you get for the rent you pay.
It is calculated on your basic salary and usually forms 40% to 50% of it. This depends on where your rented home is located. So, if you live in a metro city like Mumbai or Chennai, then your HRA is calculated at 50%, else it is 40% of your basic salary.
- Leave Travel Allowance
As the name suggests, the leave travel allowance or LTA is the allowance given to you by your employer to travel. It is the amount that covers your travel cost when you are on leave.
- Conveyance Allowance
There’s some amount that your employer pays to cover transport expenses related to work. For instance, travelling from home to office and back or the money you incur to go for work-related meetings. This falls under the conveyance or transport allowance in your employee salary slip.
- Medical Allowance
You might have to pay some expenses related to your health while you are employed. This allowance provides for any such medical expenditure. Your employer provides a fixed amount, as mentioned in your online salary slip. You can avail of a tax benefit of up to Rs. 15,000 a year if you submit the bills.
- Bonus
Most employees are entitled to a bonus once or twice a year. Typically, this depends on your past performance or is given at the discretion of the company you work for. Considering this, it can be a fixed or a variable element of your payslip. This amount is taxable.
- Special Allowance
Generally, this is the balancing amount after everything is calculated under different heads. As it is a portion of your total salary, it is entirely taxable.
- Professional Tax
This is levied by the state government to permit you to work or practise a profession within the state. It is capped at Rs. 2,500 per year and can be found on your employee salary slip as PT of Rs. 200.
- Provident Fund
An essential money saving plan in India, PPF helps you accumulate funds for your goals, including retirement. This component of your monthly salary denotes the contribution made by you and your employer toward the provident fund. As per the law, 12% of your basic salary. The same amount is matched by your employer and put in your PF account. You can find it as EPF or Employee Provident Fund on your salary slips.
- Tax Deducted at Source or Income Tax
One of the complex elements of your salary slips, TDS, is the income tax deducted as per the tax slab you belong to. It is calculated on the amount post all deductions and exemptions. You can save on this amount by showing tax*-saving investments such as a life insurance plan like a term insurance plan, a ULIP, a money-saving plan, retirement plans, and so much more.
Which Life Insurance Plans Offer Tax Benefits?
The premiums of all life insurance policies, be it term plans, savings plans or Unit-Linked Insurance Plans, are eligible for tax deductions of up to ₹1.5 Lakh each year under Section 80C of the Income Tax Act. Here is how you can claim the deductions while filing your income tax* returns (ITR):
- Determine the amount of premium paid towards your life insurance policy during the financial year for which you are filing your ITR. You can claim a deduction under Section 80C on the life insurance premiums.
- While filing your ITR, enter the details of your life insurance premium payment in the relevant section of the ITR form. The exact section where you need to enter the details may vary based on the ITR form you are using.
- Ensure that you provide the correct information and supporting documents to substantiate your claim for the deduction. This will help you avoid any complications during the processing of your ITR.
- You can also consult a tax professional or a chartered accountant if you are unsure about the correct procedure for claiming a tax deduction on your life insurance premium payment in your ITR.
These are the major components of your salary slips. As mentioned before, they are crucial when planning your taxes. Apart from reading them thoroughly, you must invest in tax*-saving instruments to save your hard-earned money.
Under the Indian Income Tax Act, there are certain sections that provide tax benefits for life insurance plans:
- Section 80C: Premiums paid towards life insurance policies are eligible for a deduction up to a maximum of ₹1.5 Lakh per annum. This includes premiums paid for policies covering the life of the taxpayer, spouse, or any child.
- Section 10(10D): Any sum received from a life insurance policy, including bonus2, is exempt from tax*, provided the premium paid in any year does not exceed 10% of the sum assured. This exemption is applicable to policies issued on or after April 1, 2003.
The tax* benefits under both the sections of the Income Tax Act apply to all life insurance plans; however, it is always advisable not to purchase a life insurance plan only for the sake of claiming tax benefits. Any life insurance plan or term insurance plan should have adequate life insurance coverage for your family/beneficiaries, considering that the policy benefits will support them financially in the event of your death.
Even in the case of retirement plans, ensure that the life insurance cover is not compromised while focusing on creating a future fund.
TATA AIA Life Insurance provides various life and savings insurance plans that come with attractive tax* benefits. The premium you pay for Tata AIA life insurance plans can be deducted from your total income, thereby reducing your taxable income. These deductions under Section 80C are extremely crucial if you want to save tax*. However, ensure that you declare these deductions when filing your Income Tax returns.
L&C/Advt/2023/Mar/0733
