People just getting into the job market may find it difficult to understand the salary components that the human resources department offers.
Here are the key components of your salary slip, which can assist you in negotiating your next salary. Negotiating salary requires an understanding of terms such as net salary and cost to company (CTC).
What Makes Up Your Salary Structure?
Basic salary: This is the amount paid to the employees excluding allowances and bonuses. The basic salary is usually determined by your previous salary and the average salary in your industry. It often accounts for 40-50 per cent of your monthly income.
Employers generally attempt to keep this component of your compensation package low, since several other benefits are calculated as a percentage of the basic salary. As an example, gratuity payments that you receive upon leaving a company are calculated as a percentage of your basic salary.
When negotiating your salary with an employer, strive to obtain a basic salary as high as possible. Since it is fully taxable, you will be required to pay tax on 100 per cent of this amount at your applicable income tax rate.
Dearness Allowance (DA): A dearness allowance or DA is provided to public sector employees in India as a means of combating the effects of inflation on their finances. As a percentage of the basic salary, this allowance is fully taxable.
For instance, if your monthly basic salary is Rs. 50,000, and you are eligible to receive DA at 20 per cent of your basic pay, you will earn Rs. 10,000 as DA each month.
House Rent Allowance (HRA): You may be required to relocate to a new city as part of your job. To compensate employees for their rental expenses, many employers offer a financial benefit known as the house rent allowance (HRA), which is not fully taxable. You can claim for HRA exemption from income tax if you are salaried or self-employed. But this exemption is not available in the new tax regime.
Medical Allowance: A medical allowance is a fixed component of the salary structure that is used to compensate employees for any medical expenses they may incur during the year. Medical allowances are also exempt from tax, but only up to Rs. 15,000 per year.
Leave Travel Allowance (LTA): Many companies offer employees an allowance that covers domestic travel within the country when they are on vacation. This allowance is called LTA and only covers trips actually made by the employee or their dependent family. Further, LTA exemption is limited to only two journeys per block of four years, based on actual travel costs. The current block is 2022-2025.
Gratuity: This is a lump sum payment made to employees when they leave the organisation after completing at least five years of service. Further, gratuity received by an employee on account of their retirement, superannuation, or termination is fully exempted from tax.
Employee Provident Fund (EPF): Contribution to the Employees’ Provident Fund (EPF) is mandatory if you work in an organisation with 20 or more employees. As much as 12 per cent of your salary (basic + DA) as employee contribution and an equivalent amount as employer contribution is made into this account. This sum is deposited to your EPF account on a monthly basis, to help you get a sizeable corpus upon retirement.
ESIC: Employees State Insurance Corporation (ESIC) deductions cover employee insurance needs. ESIC is applicable to only employees whose gross salary does not exceed Rs. 21,000, and only companies with 10 or more employees in this bracket are required to deduct it.
Net Salary And CTC
Your gross salary is the sum of your basic salary and all allowances. But this amount will not be credited to your bank account each month.
Employers generally deduct tax at source (TDS) at a specified percentage from the monthly income paid to their employees. You can claim a refund if your tax liability is lower than the deduction made by your employer.
Therefore, the net salary, also called take-home pay, is the gross salary less deductions such as income tax, EPF, etc.
However, when shifting jobs, companies usually ask for the CTC. You can calculate your CTC by adding your net salary plus EPF, ESIC, gratuity, tax deduction and any other indirect benefits you receive from your employer.
