All you need to know about your salary slip

A salary slip shows employees' net earnings, including the deductions and premiums for various investments. It can be a hard copy printed on paper or sent over email. It is a compulsion for every employer to issue a salary slip to each employee as proof of salary payment. While most employees don't understand the significance of a salary slip, it is more than just a receipt of your monthly income.

It acts as a legal document and financial proof at banks and other government organisations. In the article below, we'll understand the components and format of a salary slip.

What is a salary slip?
 

A salary slip serves as a crucial document for both the employer and the employee in India. Components like basic salary, leave travel allowance, and special allowances represent the earnings section. You will also find deductions such as Employee Provident Fund (EPF) and Professional Tax (PT). 

This document plays a vital role in various scenarios. For example, when applying for a loan, banks typically ask for salary slips as proof of income. During tax season, your salary pay slip helps in filing accurate returns. Moreover, they assist in resolving discrepancies between the employer and employee regarding salary calculations.

Salary slips also help you understand your Cost to Company (CTC) better, revealing what portion of your total package goes into allowances and what part becomes savings through deductions like EPF. 

A salary slip is not just a piece of paper, it's a financial record that serves multiple purposes in India. Now you know what is a salary slip and its importance, let’s understand its components and format.

Format of a salary slip
 

To make salary payslips easier to understand for employees, a company always follows a format. A salary pay slip format includes the following crucial information.

• Name of the organisation
• Month for which the salary is issued
• Employee code
• Name
• Department
• Designation
• Location
• Bank account details
• Earnings and deduction
• Salary breakup
• HRA and other allowances
• Reimbursements
• Net pay

What is a payroll number?
 

A payroll number is a unique number assigned to each employee as a unique identifier. It helps identify a specific employee from the database during the salary allocation. It can commonly be found on the top of the salary slip and used for administrative purposes.

Components of a salary slip
 

An employee salary slip includes different details of your salary, such as basic pay, deductions, group insurance premiums, etc. In addition, the salary payslip also mentions details of deductions like income tax, provident funds, and others.

In the salary slip format, you will find three primary components: earnings, allowances, and deductions.

Income
 

Income on a salary slip refers to the total earnings that an employee receives before any deductions or taxes are applied.

1. Basic salary
 

The basic salary is the component on which all the allowances and deductions are calculated. It is usually 30-50% of your total CTC; however, there are no set rules, which vary depending on the employer. Banks and financial institutions look for your basic salary before offering you loans; hence you should always try to negotiate a better basic salary.

2. House rent allowance
 

HRA constitutes around 40-50% of your basic salary. It helps in efficiently structuring your taxes.

3. Transport allowances
 

Any work-related travel expenses are covered under the transport allowances. It is also calculated on your basic salary.

4. Medical reimbursements
 

It is a fixed amount that an employer pays monthly for employees' medical expenses. The medical reimbursement is a taxable amount.

5. Variable component
 

A variable component of a salary pay slip is an incentive or bonus you receive based on your performance. It is usually 10-15% of your fixed CTC and reduces your fixed salary component. The variable salary component is paid on an annual or half-yearly basis, and the amount is taxable. Always negotiate for a lower variable component as it is paid less frequently.

6. Conveyance allowance
 

Conveyance allowance is a financial benefit provided by employers to assist employees in meeting their daily commuting expenses. It's a fixed or variable amount offered as part of the salary package. Typically, this allowance helps cover costs associated with travelling between home and the workplace, such as fuel, public transportation fares, or maintenance of a vehicle. It's taxable after it crosses a certain limit.  

7. Leave travel allowance
 

Leave Travel Allowance (LTA) holds a significant place in the employee salary slip format covering their travel expenses incurred during leave periods. The amount received as LTA is tax-free up to a certain limit under Section 10(5) of the Income Tax Act, 1961. This tax exemption allows employees to deduct the LTA amount from their taxable income, reducing their tax liability. LTA encourages employees to take vacations and explore different destinations while enjoying a tax benefit. However, it's crucial to adhere to the specific rules and conditions outlined in tax laws to claim this benefit accurately.

8. Special allowance in salary
 

Special allowance is another important component of the salary, often given for specific purposes or under unique circumstances. It can cover a variety of expenses or be a form of incentive. The exact nature and purpose of this allowance varies depending on company policy and designation. 

Deductions
 

When you look at a salary slip format, you will observe that it also includes various tax deductions such as income, professional, etc.  

1. Professional tax
 

In many Indian states, employers deduct professional tax from employees' salaries. State governments impose this direct tax. Professional tax also gets calculated based on slabs which are determined by one's gross income. While most states charge this levy, a few don't. Maharashtra, Gujarat, and Andhra Pradesh are some of the states where this tax is applicable. Among these states, the rate and method of collection can differ significantly. Thus, it's imperative for employees to know the specific regulations of their residing state.  

It's important to remember that professional tax exemptions can vary by state and may apply to specific categories of individuals or professions.

2. Standard deduction
 

Standard deduction is a flat amount of Rs 50,000 that you can subtract from your gross salary to lower your taxable income. You don't need to show any proof of expenses to claim this exemption. 

3. Tax deducted at source
 

Section 192 of the Income Tax Act, 1961, mandates every employer to deduct Tax Deducted at Source (TDS) from an employee's salary if it goes beyond the basic exemption limit. The employer must carry out this tax deduction before depositing the salary into the employee's account. 

In India, both the payer and receiver of income must understand the importance of TDS, as it helps to prevent tax evasion. Employers must follow the tax rates set by the tax department for deducting TDS as it serves as an efficient, transparent, and steady method for tax collection. 

4. Employee provident fund
 

Employers, as a rule, contribute a certain percentage of an employee's salary to the Employee Provident Fund (EPF). This fund serves as a retirement savings scheme. Both the employer and employee contribute to this fund, ensuring a nest egg for the employee's future. The government sets the rate of interest for this fund, with regular evaluations and updates. It not only helps in financial security during post-retirement years but also offers a tax-saving benefit under Section 80C of the Income Tax Act. 

EPF encourages long-term savings for retirement and under certain circumstances, the employee can withdraw funds before the stipulated period. This includes scenarios like medical emergencies, financial emergencies, a home purchase or construction, and a child's wedding and education.

In addition to instruments like EPF, you can also consider other avenues to save on taxes and earn returns. For instance, you can choose an IDFC FIRST Bank Fixed Deposit (FD). It offers attractive FD interest rates and gives you the choice of monthly or quarterly interest payouts. If you are a senior citizen, you can benefit from an extra 0.5% interest rate and face no penalties for early withdrawals.

5. Gratuity
 

It is a compulsory component mentioned in the employee salary slip. Your employer deducts a specific monthly amount from your basic salary and pays you after a fixed tenure of five years. It means that you can avail of your gratitude amount after you have served a company for five years or more.

A salary statement is not only an income receipt but also a legal document of your employment with your company. Government organisations and banks may also ask for your salary pay slip before offering various services. Therefore, it is essential to understand every component of your monthly salary slip .

Why is a salary slip Important?
 

A salary slip is a crucial document that serves multiple purposes, ranging from being a proof of employment to aiding in financial planning. It provides a detailed breakdown of an individual's earnings and deductions, acting as a comprehensive record. It helps in understanding one's compensation and also plays a vital role in various other aspects of professional and financial life.

• Proof of employment

A salary payment slip stands as undeniable evidence of one's professional association with an organization. This piece of document does more than just validate your monthly compensation. It also confirms an individual’s active role in the workforce. In scenarios where verification becomes crucial, such as visa applications or housing rentals, showcasing a salary pay slip offers assurance.  It communicates that an individual remains gainfully employed and, by extension, financially stable. This slip further improves your standing, showing your commitment, stability, and reliability in the eyes of external stakeholders. 

• Income tax planning

Having a salary statement in hand simplifies income tax planning. The document outlines various earnings and deductions, offering clarity on taxable income components. When it's time to declare investments, exemptions, and deductions, the salary pay slip acts as a handy reference. With every component like basic pay, allowances, and deductions itemised, you gain clarity on which sections of your income fall under taxable categories. This way, you can quickly assess your tax liability and strategise accordingly. 

During tax-filing seasons, rather than scrambling for information, a well-organised stack of these slips provides a consolidated view of annual income, ensuring that you neither overpay nor underpay your due taxes. Avoiding overpayment saves money, while avoiding underpayment circumvents potential legal complications.

Moreover, in case of discrepancies or disputes with tax authorities, an employee salary slip serves as robust evidence. It fortifies one's stance, facilitating smoother resolutions. Thus, for anyone aiming to maintain fiscal discipline, understand their tax obligations, and craft an efficient financial roadmap, salary slips are indispensable. 

• Seeking future employment

When you are on the hunt for a new job, a salary slip becomes a valuable asset. Potential employers often examine your salary slip to determine your previous compensation and gauge your worth in the market. By furnishing this document, you actively communicate your value, setting a baseline for compensation negotiations. The payslip not only chronicles your monetary history but also reflects your career growth, bonuses, and increments, suggesting your performance and dedication over time. 

A steadily rising pay indicated on consecutive salary slips can impress future employers, signifying your professional achievements and commitment. In remuneration discussions, or when vying for a higher position, presenting a comprehensive salary history via these slips can give you a competitive edge and enhance your negotiating power.

For instance, when negotiating a job offer, a candidate with well-documented salary pay slips can validate their previous earnings, potentially securing a higher starting salary in the new role.

• Avail loans and credit card

Entering the world of credit requires validation of one's financial standing. Whether seeking a personal loan, buying a house, or applying for a credit card, financial institutions demand proof of income, and presenting a salary payment slip matters. It establishes an individual's creditworthiness, showcasing a consistent flow of income. Lenders, upon scrutinising this document, may determine your loan eligibility, interest rates, and credit limits. 

Remember, in the eyes of a financial institution, a regular income depicted by consistent salary slips often equates to reduced lending risk. So, salary slips not only speed up the verification process but also increase your chances of securing favourable loan terms or higher credit limits. 

Without an employee salary slip, navigating these situations can be a bit challenging.  

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.