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What Is Salary Slip & Why Is It Important In Tax Saving?

What Is Salary Slip & Why Is It Important In Tax Saving?

Salary Slips and Tax Saving
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A salary slip, also called a pay-slip is an official document issued by an employer to its employees, often after the salary is credited. This document contains a detailed breakdown of the employee’s salary including employer perks, deductions and allowances for a given month. It also reflects the amount deducted from one’s salary on behalf of the income tax department.

Salary slips are far more useful than just a paper to keep for a few extra facilities. Salary slips are required while taking loans, applying for credit cards, switching employment or making an investment that required furnishing income proofs. The particulars of a salary slip are based on the gross tax slab of the employee, and one can reduce this amount by investing in tax saving investments like equity funds, PPF, NPS, and life insurance.

What is the Salary Slip?

Salary slip is a legal document and proof of your income and deductions from your employer. However, salary slips are not just a monthly receipt of your income, but also gives a detailed breakdown of your salary.

Broadly, a salary slip will have three sections to it:

1. Employer & Employment Details

2. Earning Heads or Income & Allowances

3. Deductions

CTC Vs In-Hand Salary

Depending on the type of process your employer is using, you may receive the salary slip in your inbox, or can download from the HR portal. Few things you should note, however, are the three sections and clear classification of CTC and in-hand

CTC or cost-to-company is typically the company’s cash outflow for your position. CTC often include the premiums paid for employee benefit schemes as well.

For example, many employers nowadays include the group health and life insurance premium, gratuity premium and the employer’s EPF (or NPS) contribution under CTC. Which, technically, is an amount spent on you but may or may not benefit you immediately.

As you may notice in your salary slip as well, the total income consists of multiple smaller components. Most of these are allowances. The trend of dividing the total salary between basic and allowance began with the introduction of various allowances in the Income Tax Act of India. Thus, your salary slip is also a preliminary document detailing your income’s taxability.

Tax Saving vs The Salary Slip

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:

  • Fully taxable allowances
  • Partially taxable allowances
  • 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.

Estimate Your Tax Saving Need

Salary slip will help you estimate your tax liability. Although the salary slip contains a tax deduction (TDS), your final tax liabilities would differ based on your actual income. The TDS amount on your salary slip is based on your estimated income for the next financial year. However, your final tax liability at the end of the year can differ based on the following factors:

  • Actual on the job expenses
  • Your house rent
  • Mid-year appraisal
  • Performance bonuses

Therefore, you will need to follow through with your tax-saving investments as well through the year, as your income and expenses change.

How Much Tax You Can 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 citizens
  • 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.

Maximizing 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.

Speak to an insurance specialist now!

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