All You Need To Know About Different Salary Components

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The excitement associated with your first job is unexplainable. One of the most exciting things of getting into a new job is the first pay cheque at the end of the month. However, that excitement comes with some confusion owing to the gibberish that you come across for the first time with regards to your salary. The salary mentioned by company to you was X rupees, but the amount which you receive is less than that amount. Where’s the rest of the money? This is the most typical question that one gets on receiving the pay slip. It is usually less than the expectation of a newly hired employee.

Salary Components

There are various terminologies associated with salary that are difficult to understand for a fresher. Terms such as CTC, basic salary, gross salary, allowance, reimbursements, tax deduction, provident fund, and insurance often create perplexity. One is usually baffled when one has to calculate home salary. Hence, we have attempted to trace all the terms associated with salary in order to make this issue simpler for all of us to grasp the concepts and familiarize yourself with them.

The following are those various components in your Salary:

  1. Understanding the phrase CTC – The “Cost to Company” or CTC as it is usually referred to, is the total amount that a company spends on an employee. However, CTC does not mean the amount that you will be receiving in your pay slip. There are other allowances in your CTC that you won’t receive in your take home salary. In interviews, companies generally portrays the CTC and not the take home salary. Your CTC is includes your basic pay, direct benefits, indirect benefits, your contribution towards savings and tax deductions.
  2. Basic Salary – Basic salary is the core salary and is a fixed part of one’s compensation package. In other words, it is the amount to be paid to an employee and many parts are added or deducted on this amount. The basic salary depends on the employee’s designation or position and also the company in which the employee works. Your basic salary can be calculated by minus your allowances, reimbursements, insurance and provident fund (P.F.).
  3. Gross salary – Gross salary is the salary inclusive of your basic salary and other allowances.

    Gross Salary = Basic Salary+ Other Allowances

  4. Allowance – Allowance is the amount to be received by an individual for meeting his service requirements. Allowances are given in addition to the basic salary of a worker. Allowances depend on industries and various types of allowances are given such as the HRA (House Rent Allowance), Leave Travel Allowance (LTA), Children’s Education Allowance (CEA), Phone Allowance, Travel Allowance etc.
  5. Reimbursements – Occasionally, employees are entitled to certain reimbursements such as medical treatments, phone bills, newspaper bills etc. The money is not received directly in the salary, but on submission of the bills reimbursement is being provided. Generally, there is a limit for every category of reimbursement.
  6. Provident Fund or PF – Provident fund is an investment both by the employer and employee each month, the lump-sum amount which is being provided to the employee on retirement. Provident fund is 12 percent of the basic salary and is directly deposited in the employee’s PF account. So, the twelve percent of the basic salary gets contributed from the employee and another twelve percent by the employer. Contribution for provident fund is not compulsory for Indian companies.
  7. Tax– The tax imposed on one’s personal income is called Income Tax. If your yearly income exceeds the maximum amount which is not chargeable, you will have to pay a tax at the rate prescribed under the finance act of government. Usually, the employee gets his/ her salary after the tax is deducted by the employer. This procedure is called as Tax Deduction at Source (TDS). The company has to issue a Form 16 which contains the details about the annual income of that employee and the amount of tax deducted.  The tax which is deducted is paid to the government by the company. Professional Tax is the tax imposed by the state government for letting an individual practise a certain profession. The maximum amount of professional tax payable per year is INR is 2,500. It depends on one’s monthly wage and also on the state in which you are working.
  8. Life Insurance and Health Insurance – Many firms and companies provide a health insurance to their employees and their family and also a life insurance, the premium for which is carried by the employee and is included in the CTC.
  9. Gratuity – Gratuity is the portion of the salary that is received by an employee from the employer for his/her services offered by the employee. Dearness Allowance or DA is a living allowance given to employees and is calculated as a percentage of one’s basic salary. The percentage value is different for each company and is not mandatory for every company.

    Gratuity = [(Basic Pay + D.A) x 15 days x No. of service years] / 26

  10. Financial year (FY) – To understand tax better, let us understand what a financial year means. A financial year is a year enumerate for taxing and accounting purposes. It begins from April 1 of a year and ends on March 31 of the following year. It is the year in which the employee has earned the income. Therefore, if you are filing a return this year, that is 2016, the financial year will be 2015-16.
  11. Assessment Year (AY) – Assessment year is the year in which an employee files his returns. It is the year in which the income that an employee has earned in the financial year will be evaluated and checked. For example, if your income is between 1 April 2015 and 31 March 2016, then 2016-2017 will be your Assessment Year. Hence, it is the year in which your tax liabilities will be evaluated and calculated on the previous year.

Also read “Really Shocking Things Will Happen When 1$ = 1INR“.

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