Decode your Payslip

It’s the pay cheque that gets all our attention with only a cursory glance being reserved for the pay slip. Many people disregard it completely, apart from the ‘net pay’ part of it, which they know very well in any case. The rest, be it deductions, allowances or taxes, is regulation babble our eyes are accustomed to skimming over. However, far from being an incomprehensible and useless piece of paper, a pay slip can give an indication of the current state of your finances and indicate the direction they are headed.

It can also give you signals for corrective action. “The CTC (cost to company) offered could be higher, but the in-hand salary may be lower; it’s the in-hand salary that one is interested in,” points out Vishal Chhiber, head of human resources, India, Kelly Services.

So, how do you decode the signals of a pay slip? Here’s an indicative guide of what the eight most important components commonly found in a pay slip are all about. Three other components could feature in a pay slip. One is the leave travel allowance (LTA)—paid for travel undertaken by you and your family within the country while on leave with tax breaks for a maximum of two journeys in a block of four calendar years. The second is medical reimbursements (on submission of relevant bills), tax-free up to Rs 15,000 annually. The third is a deduction of professional tax that varies from state to state with the maximum tax levied on you as a professional hovering around Rs 200 per month if you earn in excess of Rs 10,000 per month.

What’s this? It’s the monthly base amount you are entitled to. This is the biggest part of your pay, typically 50-60 per cent of your cost to the company (CTC). The basic tends to form a higher portion of the salary at junior levels. At senior levels, the proportion of basic goes down and variable pay components such as target-linked bonuses come into the picture. It is also the largest source of the income tax payout, be it at source (your employer), or at the end of the year.

Why it’s important? Your basic determines the other components of your pay, such as provident fund (PF) contribution (both by you and your employer) and house rent allowance. Entitlement to loans by employers and, sometimes, designations and salary grades are linked to the basic. Figure out your basic in the compensation package being offered in a new job to get a fix on your take-home pay.

Conveyance allowance
What’s this? This is paid to cover your work-related travel needs. Up to Rs 800 is exempt from tax every month.

Why it’s important? This component helps make the pay more tax-efficient and influences the take home pay of those at lower levels of pay.

Performance Bonus
What’s this? This is pay that is linked to performance, often evaluated on the basis of pre-determined targets and other metrics. This comes to you as a lump sum at a certain time of the year. At the time of hiring, your employer might mention the minimum target or maximum amount you are entitled to under this head.

Why it’s important? While this adds to your income, it also increases your tax payout as it is taxed at the applicable income tax rates. During an economic boom, as in the last few years, this tends to be high and, as a result, the tax payout doesn’t hurt as much. It is excellent for investments in higher risk, higher reward investments such as equity funds through staggered investments via systematic transfer plans (STP).

Education allowance
What’s this? Rs 100 per month per child is tax exempt for up to two children. Why it’s important? This combines with a deduction of tuition fees for a maximum of two children under Section 80C. Loans From Employers

What’s this? When you take a loan from your employer, often at a concessional rate, you need to repay a portion of it every month, much like EMIs of commercial loans. This gets deducted from the pay every month. The differential between the market interest rate and the employer’s rate is taxable under the applicable tax rate.

Why it’s important? It reduces your take-home pay and also your ability to service other loans.

House Rent Allowance (HRA)
What’s this? You are compulsorily entitled to a certain sum of money from your employer under the HRA subhead. This will vary with your designation and role in the band of 10-35 per cent of your Basic. HRA is exempt up to a certain limit provided you are actually paying house rent and furnish the lease document or rent receipts. The lowest of the following three amounts is exempt:

1. Fifty per cent of your Basic if you live in any of the four metros—Delhi, Mumbai, Kolkata or Chennai. Forty per cent of the Basic if you live in a non-metro.

2. Actual HRA received till the time you occupy a rented accommodation.

3. Rent paid in excess of 10 per cent of your Basic.

HRA in excess of the of the lowest of the above three amounts is taxable.

Why it’s important. What follows from the above is that the tax outgo on HRA will be zero if HRA itself is the lowest of the above mentioned three amounts. That’s the ideal situation as far as tax is concerned. That may not be possible all the time, but, from the tax point of view, your pay is more efficient if the HRA is lower.

Income Tax
What’s this? Tax deducted at source by your employer according to your tax slab. Currently, these slabs for working males are: Rs 1,10,001-Rs 1,50,000 is taxed at 10 per cent, Rs 1,50,001-2,50,000 is taxed at 20 per cent and salary above Rs 2,50,000 is taxed at 30 per cent. In addition, an educational cess of 3 per cent is levied. Employers take into account evidence of rent or lease receipts, tax-saving investments, among other things, while deducting taxes.

Why it’s important? It influences your take-home pay. Your loan repayments should not exceed 45 per cent of your take-home pay. Deductions up to Rs 1 lakh under Section 80C and Rs 15,000 under Section 80D (for health cover premiums) can not only provide insurance cover and create wealth for you, but also save you taxes.

Provident Fund
What’s this? It is the mandatory deduction of 12 per cent of your Basic every month by your employer, who makes a matching contribution. The accumulations earn interest at a rate earn announced every year by the Central Board of Trustees of the Employees’ Provident Fund Organisation (the last announced rate was 8.5 per cent). The contributions get tax exemption under Section 80C. A person may increase his own contribution up to 100 per cent of his Basic (there is no compulsion on the employer to increase its contribution beyond 12 per cent of the employee’s Basic).