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What is Salary Slip - Pay Slip Format, Components & Importance in Tax Saving

What is Salary Slip - Pay Slip Format, Components & Importance in Tax Saving

Salary Slips and Tax Saving
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A salary slip or payslip is a financial legal document, which, works as proof of compensation you receive from your employer. It will show all the components of your salary including base salary, mandatory and temporary allowances, deductions, tax paid, etc.

Issuing salary slips to their employees is a legal requirement for the employers. Even though employers must issue salary slips to their employees, it is not mandatory to provide printed slips. For employees, a salary slip works as proof of income. The particulars of a salary slip are can help you investing in tax saving investments like equity funds, PPF, NPS, and life insurance.

What is a Salary/Pay Slip?

An employee salary slip is a legal document that an employee receives from their employer every month. A salary slip contains a detailed breakdown of employee salary from gross salary to the in-hand salary with deductions. Pay slip is issued every month after your employer provides your salary.

What is a Payroll Number?

The payroll number on a salary slip is a unique code. This code helps the company to identify an employee while paying the salary and even in the future when an employee has left the organisation.

The payroll number is usually only for administrative use and an employee does not have anything to do with it. However, some employers may use your EPF (Employee Provident Fund) or NPS (New Pension Scheme) number in the unique code.

What is the Format of a Salary Slip?

Employers in India do not follow a standard salary slip format. However, every salary slip will mandatorily contain certain information. Depending on the type of company and compliance the salary slip may contain the following info:

a) Month and Year of the Salary Paid
b) Employer’s Name, Address, UIN/CIN, TAN and PAN
c) Employee Name, Code, Designation and Department
d) Employee PAN and Bank Account Number
e) EPF Account Number and UAN (Universal Account Number)
f) Total Work Days and Number of Leaves
g) Classification of Earnings (income) and Deductions
h) Net Pay in Numbers and Words
i) Leave Balance

What are the Components of a Salary Slip?

The primary component of a salary slip includes all the heads affecting your gross income. The heads are divided into Income and Deductions. Let us understand these two sub-components in more detail:

a) Incomes

The following components usually form part of your salary income.

1. Basic Salary

The basic salary is the primary component of your salary income. It is the basis of all other salary components including the deductions.

2. Dearness Allowance

Dearness allowance is a part of old corporate and government salary structures. It is meant as an allowance to compensate against inflation. Dearness allowance is estimated as a percentage of basic salary. This allowance is fully taxable.

3. House Rent Allowance

HRA or house rent allowance is to compensate you for the monthly rental expenses for the house. This allowance is usually up to 50% of your basic salary. HRA is partially taxable based on your city of residence and rent paid.

Learn how to calculate HRA benefits here.

4. Conveyance Allowance

This is an allowance to compensate you for your daily office commuting expenses. This allowance is tax-free up to the limit defined in the annual Union Budget.

5. Medical Allowance

A medical allowance is a fully taxable allowance as this comes under Section 80D, and the maximum limit prescribed is Rs. 15,000 annually.

6. Leave Travel Allowance

Leave travel allowance is also a partially taxable allowance. This allowance is offered for employees to travel to their hometown twice in a block of four years.

7. Special Allowance

Special allowance includes all the remaining part of your salary. This allowance is fully taxable. There are two different categories of special allowance – personal allowance and official allowance.

b) Deductions

The following components may show deduction amounts from your salary:

1. Provident Funds

Your contribution along with your employer’s contributions to your provident funds like EPF or NPS is shown as deductions on the salary slip.

2. Professional Tax

Professional tax is a state tax applicable for certain professions. If it applies to your employment the deduction will appear on your salary slip.

3. Income Tax

Advance income tax deductions are part of your monthly salary. These deductions are based on anticipated income for the financial year. You can reduce this deduction by declaring tax-saving investments to your employer.

4. Unpaid Leaves

If you have taken any unpaid leaves during the month, the deducted salary will appear under this head.

5. Gratuity and Health Cover Premiums

Although not part of your income, employers often includes such employee benefit payments as a part of CTC (cost to company). If so, the amounts are shown as a deduction on your salary slip.

Importance of a Salary Slip

Salary slips are an important document of your employment. It can help you with the following important activities in your life:

1. Works as a Proof of Employment

A salary slip is a readily available document to show your continued employment.

2. Becomes the Basis for Income Tax Payment

Different components of your salary will attract a different amount of tax. Your tax estimate for the financial year is based on your salary structure provided in your salary slips.

3. Helpful while Seeking Future Employment

Your salary at the new employer usually depends on your last drawn salary. Salary slips help you negotiate a better salary with the next employer.

4. Helps Avail Loans

Salary slips are an important document while applying for a loan. Your eligibility for the loan will depend on your salary structure and money received every month.

5. Income Proof for Insurance and Credit Cards

You will need to show proof of income while purchasing life insurance as your maximum life cover eligibility is defined by your income. Similarly, your credit card limit is also defined by your salary. Thus, a salary slip is an important proof of income and employment for both.

Difference between Cost to Company (CTC) and In-hand or Gross Salary

Cost to company or CTC refers to the money spent by the employer for the benefits directly and only available to you. For example, CTC may include the following amounts:

a) Premium paid for the group health and life insurance coverage available to you and your family members
b) Premium paid for maintaining gratuity and leave encashment insurance plans
c) Employer’s contribution to your EPF or NPS retirement account

These amounts and similar expenses will form part of your CTC. However, these amounts are never payable to you directly. On the other hand, gross salary refers to the total amount of money payable to you as salary. This means all the cash allowances, your self-contribution to EPF or NPS, leave salary, etc. will be a part of your gross salary.

In-hand salary is the amount of money you finally receive after all the deductions. In-hand salary is what reflects your bank account statements. In-hand salary is also called net salary on the salary slip.

Example of CTC, Gross Salary and In-Hand Salary

The following table shows the estimates of gross salary, the cost to the company and net salary or in-hand salary. Remember the advance tax is estimated on a gross salary after allowing for deductions. Employer’s contribution to your EPF/NPS retirement accounts is exempt from tax under section 80CCD(2).

Income Deductions
Basic 40,000 EPF/NPS Contribution 12,000
DA 10,000 Professional Tax -
HRA 20,000 Health Insurance Cover 210
Conveyance 1,800 Advance Tax 5,500
Medical 15,000 Gratuity 310
Special Allowance 60,000 Unpaid Leaves -
Employer's Cont. to EPF/NPS 2,000 Deductions Total 17,764
Total In (Gross Salary) 1,48,800 Net Salary (Payable) 1,30,410
Cost To Company (CTC) 17,85,600 P.A.

Various components of the salary slip are taxed differently. Meaning the tax on allowances is different from the tax on basic salary. You can receive three different types of allowances based on their tax treatment:

a) Fully taxable allowances
b) Partially taxable allowances
c) Fully exempt allowances

Any allowance which doesn’t fall in the partially or fully exempt category is fully taxable. You can add the fully taxable allowances like personal allowance, variable allowance and miscellaneous in the example salary slip, to the taxable income in full.

You will need to calculate the exempt amount of the partially exempt allowance like – House Rent Allowances (HRA), conveyance allowance, entertainment allowance and special allowance. Conveyance allowance is exempt up to Rs. 1600 per month, while special allowance depends on the actual money spent on the performance of your duty.

The employer may provide a special allowance for certain expenses you may incur in the course of your duties. Thus, the allowance is exempt to the extent of your expenditure.

How can a Salary Slip help you Estimate Tax Saving?

Salary slip has multiple different types of components. These different components can be classified into the following three categories:

a) Fully-taxable
b) Partially Exempt/taxable
c) Fully Exempt

Fully Taxable Basic Salary, DA, Medical Allowance, Special Allowance, Leave salary (received during employment)
Partially Exempt/taxable HRA, Conveyance/Transport Allowance,
Fully Exempt Employer’s PF/NPS contribution*, Employees contribution to PF/NPS

* Only exempt up to Rs 2.5 lakhs per annum

Thus, a salary slip can help you estimate your taxable income for the financial year. If your taxable income is higher than Rs 5 lakhs for the FY, you must consider tax-saving investments to reduce your tax liability.

However, you can only claim up to Rs 2 lakhs in tax-saving investments. For example, if your taxable income for the year is Rs 7 lakhs you can plan to invest up to Rs 2 lakhs to bring your income back to Rs 5 lakhs. This will reduce your income tax liability to zero.

How much Tax can you Save?

The amount of tax you can save will depend on your net taxable income and applicable tax slabs. To reduce your tax liability, you will need to reduce your total taxable income by investing in tax saving options.

The Income Tax Act provides multiple sections which list the specific expenses and investments leading to a reduction in taxable income. The most popular of these are the following:

Section 80C, 80CCC, 80CCD(1)
  • Unit Linked Insurance Plan (ULIP) Premium
  • Term Life Insurance Premium
  • Children’s tuition fee for full-time courses
Total combined limit is Rs. 1.5 Lakhs
  • Home loan repayment
  • Contribution to PPF (Public Provident Fund), EPF (Employee Provident Fund) & NPS (New Pension Scheme)
  • Investment to National Saving Certificates (NSC VIII Issue)
  • 5-Year Tax Saving Fixed Deposits
  • Investment to Equity Linked Savings Scheme (ELSS)
  • Deposits into Sukanya Sammriddhi Yojana (SSY)
  • Purchasing Senior Citizen Saving Scheme (SCSS)
  • Investment in Pension Plans from life insurers
  • Infrastructure Bonds
Section 80CCD(1B) Additional Rs. 50,000
  • If you are contributing to NPS and your contribution exceeds 10% for salaried and 20% of annual income for self-employed.
  • Thus, using NPS Tier-I account as retirement solution can increase your total eligible deduction under section 80C to Rs. 2 lakhs
Section 80D Up to Rs. 75,000
  • Available on Mediclaim and health insurance premium
  • Premium paid up to Rs. 25,000 for self, spouse and children is eligible for deduction
  • If you pay Mediclaim premium or bear medical expenses of your parents in the previous year, you can claim up to Rs. 50,000 more
Other Investments & Expenses
  • Section 80DD: Money spent on caring for a person with a disability - Rs. 75,000 if 40-80% disability, Rs. 1.25 Lakhs for more than 80% disability
  • Section 80DDB: Money spent on medical care for self or a dependent person suffering from a specified disease. Rs. 40,000 if aged below 60, Rs. 1 Lakh for senior
  • Section 80G: For donations to registered social and political organisations.

You should note that the deductions from your CTC on the salary slip for health and life insurance do not fall under section 80C or 80D. These are employer expenses and are not part of your taxable income. You can straightaway reduce your gross total income by the employer expenses included as deductions in your salary slips.

Maximize your Tax Savings

The best way to maximize your tax savings is to maximize your savings. To maximize your savings, you need to follow the few old principles – invest first and spend later.

Appraisals and annual bonus declarations suddenly increase your taxable income. Sadly, you can do little to plan for such growth, but you can certainly increase your monthly saving and investment immediately.

This will keep you ahead on the tax-saving curve and reduce your tax liability at the end of the financial year. And your salary slip is the best place to start. You can even get your salary restructured between allowances to maximise your exemptions.

FAQs on Salary Slip

You can ask your employer for a printed salary slip anytime during your employment. Alternatively, your employer may also share a salary slip with you every month on the email which you can print.

Most mid and large size firms use employee management panels. You can access your profile on this panel with the login provided by the employer. You can download your latest salary slips from there.

Handwritten payslips are a rarity in today’s digital world. However, the slips can work if it has the signatures of the authorised signatory of your employer. But it’s better to draft a salary slip on your computer and get a printed copy signed by your employer.

Banks may ask for salary slips if you are applying for a loan, credit card, for KYC and similar purposes. Other than this, the bank which has your salary account may not ask you for your salary slips.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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