How to read your pay slip: Key cuts in your take-home pay

Have you ever wondered why your take-home salary is less than your gross salary? Do you understand your salary structure? What’s the difference between cost to company (CTC) and take-home pay?  How much does your employer contribute to your provident fund? 

The CTC represents the total cost to the company, which is usually higher than your take-home salary as it includes various expenses the company may incur, including taxes.

Components of salary

Fixed components: The main fixed components of your salary are the basic salary, the dearness allowance (DA), and the house rent allowance (HRA).

Variable components:  A portion of your salary, known as variable pay, depends on individual or company performance and can fluctuate.

Retirement benefits: Your salary includes the Provident Fund (12% of your basic income), superannuation, and gratuity, which are part of the deductions.

"Understanding the deductions from your paycheck is essential for effective financial management. Key deductions such as Tax Deducted at Source (TDS) can be minimised through tax-saving investments under sections like 80C and 80D. Provident Fund (PF) contributions from both you and your employer play a crucial role in retirement savings,” said Kuljeet Singh of GI Group Holding.

“Other mandatory deductions include state-imposed Profession Tax, Employee State Insurance (ESI) for health benefits, and various loan repayments, all of which can affect your take-home salary. Voluntary contributions to savings schemes like the National Pension System (NPS) or Voluntary Provident Fund (VPF) can enhance your financial security,” added Kuljeet Singh.

Gross salary: This is the total amount you earn before deductions are made.

Take-home salary:  Also calloed net salary, this is what you receive after all deductions have been applied. 

Salary deductions

Gaurav Gunjan of Gupta Sachdeva & Co Chartered Accountants listed the following mandatory deductions: 

TDS: This is a government tax on your income, calculated based on your applicable tax slab and filing status.

Provident Fund (PF): A retirement savings scheme where:

Employee contribution: You contribute 12% of your basic salary (which is tax-deductible).

Employer contribution: Your employer adds 13.61% of your basic salary, which includes contributions for the employee pension scheme and administrative charges.

Profession tax (PT): A state-specific tax that varies depending on your location.

Voluntary deductions: In addition to mandatory deductions, you may choose to make the following voluntary deductions:

National Pension System (NPS): A pension scheme offering tax benefits up to ₹1.5 lakh under Section 80C and ₹50,000 under Section 80CCD.

Life Insurance Corporation (LIC) premiums: Contributions to life insurance plans that also provide tax benefits up to ₹1.5 lakh under Section 80C.

Loan repayments: For loans such as home or car loans.

While salary slips can vary across companies and sectors, certain elements remain consistent, such as your name, PAN, employer's registered name, provident fund account number, and UAN.

Components of Pay Slip

Basic salary: The fixed part of your salary.

Dearness Allowance (DA): An adjustment for inflation.

House Rent Allowance (HRA): A tax-free benefit for housing.

Conveyance Allowance: A tax-free benefit for transportation.

Medical Allowance: A tax-free benefit for medical expenses.

EPF contribution: Contributions from both employee and employer.

ESI contribution: Contributions from both employee and employer.

“It’s essential for employees to understand paycheck deductions, as many find them confusing. Clarity in this area is key for effective financial management. Common deductions include central and State taxes, social security, and medicare contributions. In contrast, voluntary deductions, such as retirement plans and health insurance, are vital for long-term financial health,” said Saif Ahmad Khan.

(By arrangement with livemint.com)