Decoding the salary components

Cost to Company (CTC): The CTC is the entire amount a company is willing to pay for an employee, whereas your net salary is your take-home pay after deductions such as tax, medical aid, UIF etc.?The CTC amount includes the following:

CTC includes your guaranteed / fixed amounts such as:

·??????Basic / cash salary / gross salary is the actual salary you receive for rendering your services to the company - bear in mind that is amount is taxable.

·???The company's contribution such as:

·??????Guaranteed 13th?cheque

·??????Medical aid

·??????Pension or Provident Fund

·??????Death and disability

·??????Car / travel allowance

·??????Company car

·??????Company phone

?

The estimated CTC can be measured as 35 percent - 40 percent of Basic.

For the given month, the employee's total salary is Rs 26478. There is a total monthly deduction of Rs 2000 from this number. Therefore, for the month Rs 24478 is the net amount payable to the employee.

Each feature of earnings and deductions is defined as follows:

?EARNINGS

1. BASIC

The minimum amount that an employee can expect to earn during a given pay period is the basic pay of an employee, excluding additional financial or tangible compensation that can lift the total pay above this level. Any advantages, incentives, or raises provide extra compensation.

The following are some points about Basic Pay:

• Basic Pay helps in creating job grades.
• Basic salary is fully taxable.
• Basic salary?is the largest part of?salary?and is used as?the basis?for computing other components of?salary?such as Dearness Allowance, House Rent Allowances, and other allowances.
• Basic should not be too high: Since Basic Pay is fully taxable, hence keeping a high basic pay (say 60% of CTC) is not advisable as it will increase the tax liability of employees. It also impacts the liability of the organization since higher contributions would be required for ESIC, PF, etc.
• Basic should not be too low: If Basic is too low then the organization might not be able to meet the minimum wage norms fixed by the respective state government.

According to the salary slip attached above the Basic pay the employee is receiving per month is Rs 11111 per month.

?2. HRA-

House Rent Allowance, a partially taxable component of a salary slip refers to the amount paid by an employer to his/her employee to meet the cost of living in a rented accommodation. Regulated?by the provisions of Section 10(13A) of the Income Tax Act, HRA helps provide employees with tax benefits towards the payment for accommodations every year.

Primarily, HRA is decided based on salary. But other factor like City of Residence is also taken into consideration. In case the individual resides in a metro city, like Delhi, Mumbai, Chennai, and Kolkata, then he/she is entitled to an HRA equal to 50% of the salary. For cities other than a metro, the entitlement is 40% of the salary.

According to the attached payslip:

e?Basic Pay = Rs 11,111

e?40% of Basic = (11,111*50)/100 = Rs 5556 per month.

Since, the employee’s office is in Delhi which isa metro city and as per companies HRA policies, the HRA is calculated as 50% of the Basic Salary. The calculation above also justifies the same. Note: To calculate the HRA, the salary is defined as the sum of the basic salary, dearness allowances and any other commissions.

Only if an employee does not receive these, then the HRA will be around 40% - 50% of his/her basic salary.

?3. TRANSPORT ASSISTANCE -

Transport allowance is an allowance given to meet commuting expenses between place of residence and office or to meet personal expenditure of employee of transport business.

????According to the attached payslip:??Rs 1600.

?4. OTHER ALLOWANCE

An?allowance?is a fixed amount of money received by a salaried employee from his employer to meet a particular type of expenditure over and above salary. For example, companies provide overtime?allowance?to employees if they work more than fixed working hours.

???????????According to the attached payslip:?Rs 5491.

5. STATUTORY BONUS

Statutory Bonus in India is paid as per Payment of Bonus act (1965). The bonus rate is between 8.33% and 20% based on the 'available surplus' as mentioned in the act. Bonus is essentially deferred earnings, and some companies choose to pay it out in advance.

As per the salary slip mentioned above statutory bonus is Rs 2220.

?DEDUCTIONS

?1. PROVIDENT FUND – PF

The PF deduction in the salary slip of an employee is the contribution made by the employee to the Provident Fund account, known as Employee Provident Fund (EPF). EPF is the main scheme under the Employees’ Provident Funds and Miscellaneous Act, 1952.

In this process, the employee and employer each contribute 12% of the employee’s basic salary into the EPF account.

This salary includes any dearness allowance provided by the company.

A fixed level of interest on this amount is received based on the rules set by the EPFO.

The total amount received along with the interest is tax exempted.

The process goes as follows:

12% of the salary goes to the EPF account along with 3.67% from the company. The remaining 8.33% of the 12% is sent to the Employee Pension Scheme.

According to the salary slip attached:

Provident Funds are 12% of the Basic Salary which is Rs 1800 per month

EPF is perhaps the easiest way to save money for the future without much hassle. Apart from the pension obtained from the Employee’s Pension Scheme

?2. PROFSIONAL TAX-

Professional tax is?a direct tax that is deducted from your gross salary by your employer. This tax is levied by the state government and thus can vary depending on the state you live in. The maximum limit of which you can be charged is Rs 2500.

As per the salary slip mentioned above statutory bonus is Rs 200