Salary Slip is proof of the salary figure that an employee receives from the employer on a monthly basis. It’s a piece of documentation which is extremely important due to the following reasons:
1. Proof of employment
It’s proof of employment which comes handy while applying to any university or visa. This document verifies proof of employment & the most important source of income.
2. Tax computation
Computation of how much tax is to be paid keeping in mind the tax regulations framed by the government as the salary slip contains components that are tax-deductible. This piece of information helps us understand how to calculate returns & refunds.
3. Credit Score
Salary slips help in establishing credit score & demarcate the creditworthiness of the individual.
4. Salary Negotiation
They assist in negotiations in salary structure when an employee wants to shift from one job to the other can be done by leveraging this piece of information.
5. Access to Facilities
A salary slip helps give an employee access to multiple subsidized government facilities that are made available by India’s government including food grains at subsidized rates, healthcare, etc.
A salary slip’s format might differ from one organization to the other but, a few common ones include the following:
- Deduction Amount
- Net Pay
- Gross Pay
- Number of Days employee attended
- Name of the Employee
- Total No. of Working Days
- Employee ID
- PF No.
- ESI No.
- Signature & Stamp of the Employer
- Aadhar Details of the employee
- Name & Code of the Organisation
An understanding of your salary slip is very important as it helps in the following:
- One can choose smartly between competing offers and decide which one is the best for you.
- One’s tax liability can be optimized based on the deductions available.
- To get an idea of how much of income is a forced saving (EPF, ESI, etc)
Salary Slip can be issued in a soft or a hard copy form and gives a complete report on the salary components of the individual like Basic Pay, Allowances & Deductions.
The 8 essential components of the Salary Slip that you should know about include:
Income Part of the Salary Slip:
1. Basic Salary
Its the foremost & most key part of your salary slip as its usually the component on which all other components of your salary structure gets calculated. This is usually a 30/40% chunk of your entire take-home payout. It is 100% Taxable.
2. House Rent Allowance
This is provided to meet the expenses of the rented property the employee resides in and depends on the location of the property as well (metro/non-metro city). Its a 40-50% of your Basic Salary & it can be claimed for a tax deduction.
3. Conveyance Allowance
Very commonly known as Travel Allowance and is given to an employee to meet travel-related expenditure which includes expenses that are incurred on to and from their place of residence to work, work-related travel plans, and field trips. It is exempted from tax up to a certain limit as per the Income Tax Act.
4. Medical Allowance
This is applicable to be paid on a monthly basis for any expense incurred on health grounds. It’s completely taxable & will be paid irrespective of whether bills are shown or not.
5. Performance Allowance
Bonus, Appraisal, Incentives fall under this category of allowances which are generally done to appreciate the employee and reward him/hear for their contribution at work. There are few other allowances given depending on the industry type/company. One of which includes Dearness Allowance which is offered to minimize the impact of inflation which is completely taxable & should be shown while filing the Income Tax returns. Another type of allowance is Leave Travel allowance which is given to employees to pay for costs that are incurred when they travel on leave. It can cover the travel expenses of the immediate family members as well.
Deduction Part of the Salary Slip:
6. Provident Fund
It’s a contribution which is compulsory in nature & is usually a 12% deduction of the basic salary. An equal contribution is made by the employer subject to a maximum amount depending on company policy. A contribution to PF from the employee side is subject to exemption from tax under the section of 80C of Income Tax Act. Employees can choose to opt-out of the PF scheme but should invest this amount wisely in various investment options available in the market.
7. Professional Tax
This is the amount of tax deducted every month from the employee’s salary by the Government. It is calculated and the slab of tax is defined by the state government.
8. Tax Deducted at Source
This is a certain amount of tax that’s deducted from the employee every month from his salary on behalf of the Income Tax department of India. If the employee invests in Income Tax schemes, this deduction can be lowered based on income tax slabs.
Does Salary Slip help to Save Income Tax?
Yes, as a salary slip contains several components like Dearness Allowance, House Rent Allowance (HRA), Medical Allowance, etc. that can give an employee an opportunity to save income tax every financial year. The tax authorities enable organizations to structure salaries of their employees in a way that enables them to save tax via several allowances that are included in their income to make sure the employees can save on taxes.