If you're a full-time employee in India, payslips can be a nightmare to wrap your head around.
From the moment you begin your salary negotiations, a web of confusing terms is thrown your way that eventually shows up on your payslip, and what you end up getting in final numbers can be vastly differently from what you may have imagined.
It usually starts with an HR professional walking you through a "salary structure," rattling off a stream of impressive-sounding allowances, abbreviations, and perks that you are too embarrassed to ask more about. The smart thing to do would be to ask your chartered accountant for a quick tip but most people are just so thrilled with the excitement of landing an offer, they miss this very important step, and jump on to signing the first piece of paper they are e-mailed confirming their acceptance.
To avoid paycheck remorse, here are some important parts of what makes up your paycheck that you should know:
Offer Letter Versus Appointment Letter: Before you get to your first paycheck, here's something to be careful about. Only the final appointment letter is deemed a legitimate agreement between you and your employer. Do not take for granted anything offered over the phone no matter how senior the HR person is or how many times the offer is repeated verbally. Get a signed written offer.
CTC: Most companies in India refer to your compensation as "cost-to-company" or CTC while making an offer. Yes, that does sound like a rather mean way to inform you how much you, as an employee, will cost your employer, rather than, say, stating your rightful earnings in more socially-acceptable terms like "pay package" or "remuneration." But companies tend to stick to this abbreviation because it easily fits an array of perks that your employer counts as part of your overall compensation and help you save taxes, say experts. It also includes the matching contribution made by the employer to your provident fund account.
CTC can include several taxable salary items such as basic salary, conveyance allowance, special pay, house rent allowance (HRA). All these are liable to be taxed, and should show on your payslip.
There can also be many non-taxable perks and benefits – medical or travel reimbursements – which often vary from company to company. And these usually do not show on your salary slip, but may appear later on your annual tax forms. CTC break-ups can vary from company to company.
Basic Salary: This is the main component of your salary and is fixed. Many other important parts of your salary are derived from the basic salary including the provident fund contributions, gratuities, etc. At least 40 to 50 per cent of CTC will make up your basic salary.
House Rent Allowance (HRA): While there are no specific rules around how much HRA should be as a percentage of your basic salary, this is typically 50 per cent of the basic salary for metros cities and 40 per cent for non-metro cities. Companies are free to pick this number as a way to allow maximum tax benefit, which is considered standard practice for most private companies. It is possible to claim exemption on HRA in annual taxes if you live in a rented house.
Dearness Allowance: This has nothing to do with how dear you might be to your colleagues or your company as the name might suggest, but is in fact money that is paid to compensate for inflation, or rising prices. It also reflects on your payslip, i.e. if you get this allowance. This is typically paid by government or state-owned enterprises. Private companies tend to give annual increments to help employees keep up with inflation.
Transport Allowance: This is a tax-free allowance you are paid to account for your commuting expenses, and is tax free up to ₹19,200 per annum. It is paid to employees for the purpose of commuting between the place of residence and the place of office.
Special Allowance or Special Pay: This is basically everything that is part of your pay that is not covered under the basic salary, HRA or other taxable allowances, often used to adjust your remaining pay and is taxable. This is, again, not to be confused with a special bonus or recognition by your employer.
Annual Bonus: This is given out at the end of every year largely based on your employer's financial performance and/or whims and is taxable. You can be eligible to get additional special performance-based incentives, payouts, but those vary widely from company to company, and are negotiated at the time of taking up the job, or promotion.
Medical allowance: You are allowed to claim tax-free medical reimbursements for up to ₹15,000 a year. It's also okay to claim any dependents' claims under this allowance in most cases. However, it is up to the employer to include this in total pay.
Income Tax: Everyone who makes more than ₹2,50,000 annually is required to pay income tax and file an annual tax return. Paying taxes is not optional. The tax you pay depends on several tax slabs or tax brackets, which correspond to your income. See the tax slabs and corresponding rates here.
Professional Tax: Some states like Karnataka and Gujarat charge a professional tax and the maximum that can be collected is about ₹2,500 in a year. Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income, explains Preeti Khurana, Editor and Certified Chartered Account with tax consulting firm ClearTax.
PF Contributions: This is a very important part of your salary, and is basically money you and your employer set aside to plan for a rainy day and retirement. Employees typically make a 12 per cent contribution of your basic salary into a pension fund that your company typically nominates, which is reflected on payslips as "Employee Contribution to PF." You can claim these contributions as a tax exemption.
In addition, your employer is also required by law to make a matching contribution of 12 per cent towards your retirement funds. This 12 per cent is further broken down into 3.67 per cent that goes into a recognised PF fund or trust your company nominates; and 8.33 per cent goes into the Employee Pension Scheme (EPS), a government sponsored pension scheme, which is designed to pay a monthly pension after you reach the age of 60. Some employers may choose to also contribute to other schemes such as Employees Deposit Linked Insurance Scheme (EDLIS), but most employers choose to buy a group insurance scheme for their staff.
NPS: Some employers can additionally contribute into the National Pension Scheme (NPS), although this isn't mandatory at the moment.
So why do employers over-complicate these numbers?
One main reason is tax. Most companies and employees seek the most tax-friendly pay package for employees.
Another is the preference of employees to maximise how much money they take home, which is an increasingly worrying trend, according to Khurana.
"This is a generational shift in mindset-–people are willing to forgo benefits and are more worried about what they get in hand," said Khurana. "One must ensure there is enough going into a [retirement] fund."