Salary Breakup: Understand Your Salary Slip & Salary Structure
The salary figure is the first thing we notice while applying for a new job. But have you ever wondered how the salary you receive is determined and what factors go into it? Knowing the components of the salary breakdown will help you better understand the salary structure. It can be a bit confusing to understand the salary structure – the in-hand salary you get, the allowances you receive, and the taxes you are liable to pay. Read this blog to learn about what is salary breakup and understand terms such as CTC, gross salary, net salary, basic pay, allowances, tax deductions, and more.
What is Salary Breakup?
It is a breakdown of the components that make up an employee’s CTC (cost-to-company). Salary breakup involves analyzing an employee’s gross salary or cost-to-company (CTC) to determine the actual salary.
It is a comprehensive list of all allowances and deductions that go into the total amount an employee receives in their pay package. Several elements, such as the base salary and any benefits granted, such as a rent allowance (HRA), a travel allowance (TA), a contribution to the provident fund, etc., make up the overall salary. Here you can find out how the CTC is calculated and what components make up the total amount. Learn Excel to understand how to gather and calculate salary data.
Before you understand the salary breakup structure, it is essential to know the basic differences between CTC, gross salary, and net salary. Let us understand the meanings of each of these terms.
What is CTC?
CTC stands for cost-to-company. It is the total amount of the compensation package an employer offers an employee. This means that the amount of money you receive at the end of the month is not your CTC.
CTC = Gross salary + Allowances + Provident Fund + Gratuity.
Also Read: CTC and In-Hand Salary.
What is Gross Salary?
The gross salary is computed by combining the basic salary and other allowances before taxes and other deductions. Yearly bonuses, overtime pay, holiday pay, etc, are also included in the gross salary.
Gross salary = Basic salary + HRA + Allowances
What is Net Salary?
The net salary is the actual salary that gets credited to the account. It is the salary that the employee gets after tax and other deductions as per the company’s policy.
Net Salary = Gross Salary – Deductions
You can check out the gross salary vs net salary blog to understand the differences between the two in detail.
Components Of Salary Breakup
Various components form the CTC, and it is essential to know the CTC breakup to have clarity about the monthly salary. If the monthly gross salary is ₹60,000 and the amount received in hand is ₹55,000, where did the amount of ₹5,000 get deducted? The salary elements take up this amount. The salary structure consists of the following components:
1. Basic Salary:
The basic salary is the base income, which is a fixed component. The base income slab depends on the designation and industry that the employee works in. Hence, it increases accordingly. It does not include any incentives or bonuses.
2. Allowances:
An allowance is the sum of money paid to an employee to meet needs and expenses. Several allowances are provided by the employer, such as:
- HRA: HRA stands for “House Rent Allowance.” It is the amount of money required to cover the house rent. The HRA depends on the cost of renting a house in the city where the company is located.
- Conveyance Allowance: It is the fixed amount added to the employee’s monthly salary to cover travel expenses from the place of residence to the office.
- Dearness Allowance: It applies to working employees of the government, the public sector, and government-retired people. This allowance is given to tackle the rise in expenses because of inflation.
- Leave Travel Allowance: It is a set sum of money provided to an employee to pay for any domestic travel costs while on leave. If the LTA is ₹30,000 per year and the employee’s actual travel costs are ₹20,000, the reimbursement will only be ₹20,000. This allowance does not cover supplemental costs incurred during the trip, such as meals, lodging, and other costs.
- Medical allowance: A medical allowance is a fixed monthly amount paid to employees, regardless of whether they submit bills. Reimbursement for medical services is a payment against specific bills for which the employee has an entitlement.
3. Provident Fund:
A long-term investment and savings plan for all employees is the employer’s provident fund. This amount is paid directly into the employee’s PF account each month. Both the employer and the employee pay a certain amount into the provident fund. There are different types of provident fund plans. As a rule, 12 percent of the employee’s base salary and 12 percent of the employer’s base salary are paid into the PF account.
4. Gratuity:
Upon leaving a job, an employee receives a gratuity from their employer as compensation for their services. When an employee has worked for the company for more than five years, they are given a gratuity. The gratuity amount is deducted from their CTC every year. As per the Payment of Gratuity Act, 1972, the gratuity amount is 4.81% of the basic salary.
5. Insurance:
Most companies offer health and life insurance to provide for the well-being of their employees. A small amount gets deducted from the CTC to pay the premium for the insurance policy.
6. Income Tax:
Income tax is one of the most important salary components. It is a direct tax that the government levies on the annual income of its citizens. Typically, TDS (tax deduction at source) is subtracted from the pay, and the employee is paid with the salary remaining after taxes. The tax levied on the salary depends on the range of the income tax slab.
The following are the two tax regimes employees can choose from to calculate the tax on their salary:
| Annual Income | New Tax Regime | Old Tax Regime |
| Up to INR 2.5 Lakhs | Exempt | Exempt |
| INR 2.5 Lakhs – INR 5.0 Lakhs | 5% | 5% |
| INR 5.0 Lakhs – INR 7.5 Lakhs | 10% | 20% |
| INR 7.5 Lakhs – INR 10.0 Lakhs | 15% | 20% |
| INR 10.0 Lakhs – INR 12.5 Lakhs | 20% | 30% |
| INR 12.5 Lakhs – INR 15.0 Lakhs | 25% | 30% |
| Above INR 15.0 Lakhs | 30% | 30% |
7. Professional Tax:
A professional tax is a fee that the state government charges people to practice a certain profession, such as being a lawyer, chartered accountant, company secretary, doctor, etc. The tax is levied differently in different states and union territories. The taxable amount depends on your monthly salary and the tax rate of the state in which you are practicing a particular profession.
There are a few exemptions in professional tax. For example, any member of the force (army, navy, or air force), a person with a disability, any individual above the age of 65, a person running an educational institute, etc. are exempt from paying this tax.
How Is Salary Breakup Calculated?
Knowing the different components taken into account when determining the salary, you can calculate your net salary. Taxes and other deductions are subtracted from the gross salary to determine the net salary. The calculation is as follows:
First, find out your gross salary.
Gross Salary = Basic Salary + HRA + Other Allowances
After calculating the gross salary, you can compute the net salary.
Net Salary = Gross Salary – (Income Tax + Employer’s Provident Fund + Professional Tax)
To put it simply, the Net Salary is the gross salary minus deductions
Salary Breakup Calculation Example:
Here is an example of ₹8 lakhs salary breakup for you to understand how to calculate net salary.
- First, assume the CTC is ₹8 LPA and the yearly bonus is ₹40,000.
- Now you have to calculate the gross pay.
Gross Salary = CTC – Yearly Bonus
₹8,00,000 – ₹40,000 = ₹7,60,000
The gross salary is ₹7,60,000.
- Next, you have to calculate total deductions which include professional tax, EPF, insurance, and income tax.
- Let the deductions be as follows:
- Professional Tax = ₹2000
- EPF Contribution = ₹21,600 for employer and employee each (12% of the monthly basic salary of INR 15,000)
- Insurance = ₹2500
- Income Tax = ₹40,000
- So, your total deductions will be ₹2000 + ₹21,600 + ₹21,600 + ₹2500 + ₹40,000 = ₹66,100.
Finally, you calculate the net salary.
Net Salary = Gross Salary – Total Deductions
₹7,60,000 – ₹66,100
Net Salary = ₹6,93,900
Conclusion
To be certain of your pay structure, it is essential to comprehend the salary breakup. At the end of every month, employees have transparency and clarity regarding their pay. Furthermore, knowing your salary breakdown helps you make informed career decisions and plan your finances.
Was this blog useful in clearing your doubts about salary breakup? Share your thoughts with us in the comments section below. Further, if you wish to learn how to discuss salary during interviews professionally, you can explore the blog on how to answer what is your salary expectations.
Frequently Asked Questions
Answer: A payslip or salary slip is a document issued by the employer to the employee as legal proof of compensation the latter has received. It includes basic salary, different allowances, tax paid, and deductions.
Answer: A leave travel allowance (LTA) in the salary breakup is an allowance that is provided by the company to cover the domestic travel expenses of an employee incurred during leave. The LTA is eligible for income tax exemption as per the Income Tax Act of 1961.
Answer: The components of salary breakup are basic salary, allowances (LTA, HRA, medical, conveyance, dearness allowance), provident fund contribution, gratuity, income tax, professional tax, and insurance.
Answer: Some common allowances in the Indian salary structure are house rest allowance, leave travel allowance, dearness allowance, medical allowance, conveyance allowance, entertainment allowance, overtime allowance, city compensatory allowance, etc.
Answer: During a job offer or appraisal, employers usually propose a salary package. However, if you feel the proposed amount does not align with your education, skill, or experience level, you may negotiate a salary structure accordingly.
