Payslips are unpredictable. If you feel they look like parchments of alien literature left behind for unassuming, hard-working employees, you are not alone.
You turn to your salary slip to find out what’s happening with your money. However, it might not be an easy document to understand. If you try to compare it with the offer letter, you and might end up being even more confused. In this article, we will help you understand this essential financial document.
While all payslips look different from company to company, they all have these three sections – earnings, perks, and deductions. Here are all the key components explained that are most commonly found in payslips.
- Basic
This is the key component of your salary. It is the fixed amount that you get every month before any reductions or increases due to bonuses and allowances. Having a higher basic component puts you in a high-tax bracket. To simply put it, higher the basic, the more is your tax liability.
For each month, the basic pay shown is computer based on the no. of days in the month and the no. of payable days.
- House Rent Allowance (HRA)
HRA is a common fixture in most salary slips. As the name suggests, this allowance is given for expenses related to rented accommodation. This is also taxable, unless subjected to specific exemptions. The exemption is up to a certain limit provided that rent is actually paid and supported by relevant legal documents.
Various factors go into the calculation of HRA with the place of residence being one among them. In case you are living in a metro city, you are entitled to an HRA equal to 50% of the basic salary. For other cities, it is 40%.
- Conveyance Allowance
This is the allowance paid by the company to the employee for commuting from home to the place of work. It is meant to cover any work-related expense that may arise in the line of duty. Till last year, conveyance allowance, to the tune of Rs. 1600 per month was exempted from tax. However, based on the Finance Act 2018 (applicable from 1st April 2018) the exemption for transport allowance and medical reimbursement for salaried employees has been discontinued. Instead of these, a standard deduction of Rs. 40,000 has been introduced.
- Professional Tax
It’s a tax levied by the state government and must be paid by all earning individuals. Though calculation and the amount vary across states, every state follows a certain slab based on the income to levy this tax. The maximum cap on professional tax is Rs. 2,500.
- Income Tax
Your employer deducts a certain amount from your salary every month known as Tax Deducted at Source or TDS. While computing tax liability at the end of the financial year based on your income, if the TDS is less than the amount payable, you need to pay the difference as tax.
However, you can bring down your taxability by showing proofs of investments in various instruments such as Equity-Linked Savings Scheme (ELSS) which offer exemption for investments made up to Rs. 1.5 lakh in a fiscal. Also, being equitylinked, ELSS provides opportunity for capital appreciation in the long run compared to fixed return instruments such as and tax-saving fixed deposits, subject to risks associated with equity market.
These are some of the common components that are witnessed in any regular payslip. So, the next time you look at a payslip, you should be able to understand more of it.
ELSS funds helps you better manage your taxes and build a corpus for life goals. Visit www.savetax.idfcmf.com to know more about saving tax using ELSS
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