If you are a working professional, the first day of the month is usually when you like your bank balance. And many of you may step out for a salary day dinner or an ice-cream treat. But how many of you understand your salary structure? Do you know the difference between cost to-company (CTC) and take-home salary? Why does your salary at times fluctuate during the end of a financial year?
How much does your company contribute on your behalf towards your provident fund? If you are looking for these answers,first take a look at your CTC, the cost incurred by a company when it hires you. The CTC involves the total amount promised to you and it is usually higher than your take-home salary as it factors all the cost that your company may or may not pay in the form of tax or variables. Though salary slips will differ across companies and sectors, some of the components such as name, permanent account number (PAN), employer’s registered name, provident fund account number and unique account number (UAN) will continue to remain the same. Here’s how to understand your salary break up:
First, take a look at your monthly earnings component. “Earnings are located on the left side of the pay slip and includes basic salary, dearness allowance (DA), house rent allowance (HRA), conveyance allowance, leave travel allowance, other allowances and reimbursements. The deductions are located on the right side and include provident fund (PF) – statutory, employees’ state insurance (ESI) – statutory, professional tax (PT) – statutory, and tax deducted at source (TDS) – statutory," said Rachit Chawla, founder and CEO, Finway. While earnings are a part of your salary that is paid to you, deductions are done in two ways—from your basic salary and from your CTC. “PF and employees’ state insurance (ESI) deductions are done from your basic salary while TDS (tax deducted at source) is deducted from your CTC," said Abhishek Agarwal, senior vice president, Judge Group, a US-based staffing and technology firm.
The three main fixed components of your fixed salary are basic salary, DA and HRA. “Basic salary is your base, fixed income. It does not include bonuses, benefits or any other compensation from employers," said Rajat Mohan, senior partner, AMRG Associates. Paid on a monthly basis, your retirement benefit and HRA is linked to your base salary. “It is usually 35-50% of your CTC. DA is provided to compensate for the inflation and HRA to meet the house rent. In metros, HRA is 50% of the basic salary. Some companies pay conveyance allowance too," said Agarwal. Conveyance and other allowances, such as special allowance, can be partially or fully taxable. “Value of allowances differs from company to company and there are no government policies around it," said Mohan. Apart from DA and HRA, you may also get conveyance allowance for travel to work place and leave travel allowance (LTA) that can be used to cover your travel expense within India when you are on leave from work. “The LTA amount is exempt from tax under section 10(5) of the Income Tax Act, 1961, subject to specific conditions," said Mohan.
Your salary includes retirement benefits in the form of provident fund (12% of your basic income), superannuity and gratuity which are sub-components of the deductions. “PF is a mandatory retirement saving scheme and is managed by the government for organisations with a certain number of employees. In this employees contribute a portion of their salary and some amount is contributed by the employer. Gratuity is paid by the employer at the end of the employment period and applies after a period of at least five years," said Chawla.
There is a portion of your salary which is dynamic in nature. Referred to as variable pay, the amount depends on either the performance of the company or the performance of the individual. For instance, say ₹2 lakh is the variable pay linked to your performance in your CTC annually. If your performance rating is below a certain threshold, you may not get the full amount. However, there are also instances where the company can give 110-145% of the variable amount.
Understanding your salary structure can also help you understand taxation. You can also use your salary slip as a document for other financial requirements. “Salary slip as a document is used to avail a loan and for travel visas of some countries," said Agarwal. It is also essential to compare the salary structure for a new job. If you are not sure about your salary structure, you may not be able to negotiate salary with another organisation.