Salary Breakup | Definition & Components

image of Salary Breakup | Definition & Components

Understanding the structure of a salary breakup can be helpful both for employers and employees. So, it is important to know that in a salary breakup structure, the Cost-To-Company of the employee is divided into different components to calculate their net and gross salary.

At the beginning or end of each month, employees get their salaries for their services rendered to the organisation by employers. And as the salary comes in the form of payslips, it contains various components, such as basic salary, CTC, tax deductions, insurance, provident fund, etc. In other words, this is how a salary breakup is structured.

There are still many employees who do not understand everything that is mentioned in a salary slip. Moreover, many HR or payroll professionals – who are responsible for issuing the salary slips – are not too familiar with how a salary breakup is structured.

So, in this article, let’s take a closer look at salary breakup and its different components.

What Is A Salary Breakup?

Employees’ salaries are dissected into different components to analyse their CTC (Cost To Company) or gross salary, which in other words, is known as a salary breakup.

It is important to understand a salary breakup structure because the gross salary and in-hand salary are not the same in the majority of companies. For example, let’s say your CTC is ₹20,000 per month. However, the actual amount you get to take home every month is ₹12,000. This will include your basic salary and other allowances such as a house or travel allowance, among others. Now, what about the remaining ₹8000? Well, that would be the amount deducted from your CTC for purposes such as professional tax or provident fund (PF).

So, once you understand how your salary breakup is structured, you will be able to tell just how much of your CTC you can take home in a month.

Components Of Salary Breakup

A salary breakup of your payslip is divided into different components, yet not all slips follow the same salary breakup, as the structure depends on the company. But, all in all, a salary slip must have the following details:

  • Name of the company
  • Company’s logo
  • Name of the employee
  • Employee’s designation and department
  • Employee’s ID number
  • Employee’s PAN/Aadhaar number
  • Employee’s bank account number
  • Employee’s Provident Fund account number
  • Number of leaves taken by the employee
  • Effective workdays of the employee
  • UAN (Universal Account Number)
  • Earnings and deductions
  • Gross and Net pay

Now, we shall focus on the earrings and deduction to better understand the components of a salary breakup.

Cost To Company (CTC)

The monthly or annual amount of money that employers spend on an employee is the CTC and this includes the basic salary, allowances such as House Rent Allowance (HRA), Conveyance Allowance, Reimbursements, bonus, etc., and deductions such as Tax Deductible at Source (TDS), Provident Fund (PF) and Professional Tax.

To calculate your CTC, you can use the formula given below:

CTC = Gross Salary + EPF + Gratuity + Others

Basic Salary

The basic salary is a fixed salary, which means that it is the base amount of an employee’s salary before any dedication or addition.

The amount of an employee’s basic salary, which is generally made up of about 35% to 50% of the total salary, depends on the designation, skills, experience, educational qualification, as well as the company or industry.

Gross Salary

The gross salary is the total amount received by the employee monthly or yearly after adding the basic salary, allowances such as medical or conveyance allowance, bonus, incentives, overtime pay, and other differentials. Here, deductions and taxes are not included.

The formula given below can be used to calculate gross salary:

Gross Salary = Basic Salary + HRA + Other Allowances

Net Salary

Also known as in-hand salary, net salary is the amount an employee receives after adding allowances, incentives, bonuses, etc. and the deducting Tax Deductible at Source (TDS) and Provident Fund (PF) Or Employer Provident fund (EPF), and other deductions as per the company policy. This is the actual amount that the employee receives in his name account or, in some cases, his hands.

The formula below can be used to calculate net salary or in-hand salary:

Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employee’s Provident Fund – Professional Tax

Allowances

Allowances depend on the benefits and perks that the company offers its employees, such as travel allowance, medical allowance, house rent allowance, etc. So, let’s take a closer look at some of them.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is an addition to the basic salary given by the company for an employee’s rent accommodations. But, it is important to note that not all employees are eligible for this allowance.

Leave travel allowance (LTA)

Leave travel allowance (LTA) is an expense given to employees who are travelling domestically while on leave. However, this only covers the travel cost and not accommodations.

Medical Allowance

Many companies give medical allowance to their employees to cover their medical bills.

Dearness Allowance

Dearness allowance is often only offered to a government or public sector employee. So, this allowance helps employees in covering the escalating cost of living brought on by the effects of inflation.

Conveyance Allowance

While many companies provide cab services for their employees, some give their employees a conveyance allowance to cover the employee’s travel costs to and from work.

Tiffin/Meals Allowance

Some employers provide tiffin or meal allowance to cover their employees’ food expenses.

Variable Allowance

Variable allowances are given to employees as a bonus or incentive for their satisfactory/excellent performance or when they reach a goal set for them.

Special allowance

Special allowance is given by employers to their employees as a mode of encouragement.

Other Allowance

Other allowances can be reimbursement, entertainment allowance, city compensatory allowance, overtime allowance, etc.

Deductions

Provident Fund (PF), Professional Tax, Tax Deductible at Source (TDS) and insurance are what come under deductions in a salary breakup

Provident Fund (PF) Or Employer Provident fund (EPF)

PF or EPF is the accumulation of funds for an employee’s retirement period. Each month a certain amount is deducted from the employee’s CTC. The employer then deposits this amount to the employee’s PF account. If the employee’s basic salary is less than ₹15,000, 125 will be set aside. And if the employee’s salary exceeds ₹15,000, then either the employer contributes 12% of ₹15,000 or sets aside 12% from the employee’s basic salary. For employees in Indian companies, it is mandatory to contribute to the provident fund. This contribution and its amount will be reflected on your salary slip.

Professional Tax

Some state governments charge working individuals a professional tax, and the maximum amount can be ₹2,500 per annum. The amount deducted depends on the employee’s salary per month as well as the state. Delhi, Dadra & Nagar Haveli, Andaman & Nicobar, Himachal Pradesh, Jammu & Kashmir, Nagaland, Uttar Pradesh, Arunachal Pradesh, Punjab, Rajasthan, Lakshadweep, Chandigarh, Daman & Diu, Haryana and Goa are the states where union territories where professional tax is not charged.

Income Tax

Income tax is levied on a person’s annual income. The rate deducted varies depending on the taxpayers and their income type.

Tax Deductible at Source (TDS)

TDS is the amount calculated and deducted by the employer for their employees on behalf of the Income Tax department. In most companies, the employer gives Form 16/16A to their employees. This certificate helps employees in understanding the tax deduction breakup. The amount of tax deducted depends on the employee’s annual income.

Insurances

Insurance can include life insurance and health insurance, which are provided by many companies. A certain amount is deducted every month from the employee’s monthly salary by the employer.

Gratuity

Under The Payment of Gratuity Act, 1972, when an employee leaves the company, he/she is to receive a one-time gratuity. This applies to government and public sector employees and some in the private sector. Fifteen days’ wages of the employee’s CTC will be deducted each year by the employer. However, the employee can receive this bonus only after five years.

Public Provident Fund (PPF)

While PF  is a mandatory contribution, PPF is a voluntary contribution, meaning that the person who wants to contribute will have to take care of it himself without the employer’s involvement. The amount contributed will not be reflected in their salary slip. But in cases where the payer wants to utilise it for tax-paying purposes, they can refer to Form 16, as it will be shown there. One of the reasons employees apply for PPF is for tax-paying issues, while the other is for long-running investment purposes. This provident fund provides 7.6 per cent per annum. The contribution, as well as the maturity amount, is free of tax.

Form 16

Form 16 is given to the employee by the employer in which the details of the employee’s earned salary and tax deductions are mentioned. This document can act as proof of a person’s tax and income paid to the government to file an Income tax return every FY.

Process To Calculate Your Take-Home Salary

Take-home salary is also known as in-hand salary and net salary. Here, we have provided some of the easiest steps to calculate it.

To calculate the take-home salary, you have to subtract the Income Tax, Provident Fund (PF), and Professional Tax from the Gross Salary.

Step 1: Calculate the gross salary

Gross Salary = CTC – (EPF + Gratuity)

Step 2: Calculate Taxable Income

Taxable Income = Income (Gross Salary + Other Income) – Deductions

To find out the part of your taxable income, subtract allowances (LTA Conveyance Allowance, HRA), medical bills, professional tax, medical insurance, tax-saving investments, if any and other deductions from the gross salary.

How to calculate income:

To find out income tax, you should include income from all sources, which are:

  • Salary (salary paid by your employer)
  • House property (rental income or interest paid on home loan)
  • Income from any other profession/business
  • Capital gains (income from sale purchase of shares/house)
  • Other sources (saving account interest income, interest income from bonds, fixed deposit interest income)

Deductions

HRA

House Rent Allowance, also known as HRA, is not completely limited by tax. HRA, which you can declare is the lowest of the following:

  • The total amount attained as the HRA from the employer in the financial year.
  • Accurate rent paid in the year – 10% of the basic salary in the year.
  • 50% of the annual basic salary if staying in a metro city or 40% of the annual basic salary if staying in a non-metro city.

Standard Deduction

A standard deduction of INR 50,000 (annually) is introduced in the Budget 2019. Initially, there was a transport allowance of a maximum of INR 19,200 (annually) and a Medical allowance of a Maximum of INR 15,000 (annually), which are no longer relevant.

LTA

Leave Travel Cost can be claimed for tax released under Section 10(5) twice in a structure of four years. However, bear in mind that it only includes domestic travel, provided on the submission of actual bills.

However, remember that some components of the salary, such as telephone bill reimbursement, medical reimbursements, etc., are spared from the tax deduction.

Generally, deductions are distributed into the following categories:

Section
Nature
Limit
80C Basic deductions from the total income 1,50,000
80 TTA Interest from deposits Rs. 10,000 on interest, available to an individual and HUF. A deduction is permitted on interest earned from a savings account in a bank
80 G Donations to charity 50% of the donation is deducted from the taxable income. Nonetheless, if the amount is more than 10% of the total gross income, the quantity will be disregarded
80 E Educational loan The deduction is allowed on the total EMI part, which has no limit
80 EE Home loan interest Enabled on interest paid on a home loan that is up to a maximum of Rs 50,000 per financial year
80 D Medical insurance premium Self and family – Rs 25,000

Family, parents and self – Rs 55,000

Senior citizen parents, self and family – Rs 80,000

 

Step 3: Calculate Income Tax

When you get your taxable income, you can easily determine income tax by referring to the income-tax slab and rates given below:

Tax slab

The income tax rate is imposed on a slab system under which individuals pay taxes at different rates reflecting their income slab.

The imposed income tax slabs are amended annually during the budget, considering the individual taxpayer. Now, as per the budget announcement for the Fiscal Year 2019-20, the tax slab for individual Indian men and women residents below 60 years of age is as follows:

Net Income
Income Tax
Health and Education Cess
Up to Rs. 5 Lac Nil Nil
Rs. 5,00,000 – Rs. 10,00,000 Rs. 12,500 + 20% on income above 5 lac 4% of income tax
Above Rs. 10,00,000 Rs. 1,12,500 + 30% on income above 10 lac 4% of income tax

 

*Surcharge @10% will be imposed for taxable income between Rs. 50 lac to Rs. 1 crore and @15% for taxable income above Rs. 1 crore.

However, with the new budget announced on February 2, 2020, taxpayers can select between the current and new tax schemes.

Individual taxpayers have a choice to choose between:

  • First, the current tax scheme with existing income tax deductions and exemptions
  • And second, the new income tax scheme with lower tax rates and fewer exemptions

The new tax scheme suggested in the Budget 2020-21 offers slashed income tax rates to lower the amount of tax paid, at the same time eliminating certain deductions and exemptions.

Based on the amended tax scheme, the tax slab for individuals below 60 years of age is like this:

Income Tax Slab
Tax Rate
Up to Rs 2.5 Lac Nil
Rs 2.5 Lac to Rs 5 Lac 5% (Rs 12,500 tax reba5te per section 87A)
Rs 5 Lac to Rs 7.5 Lac 10%
Rs 7.5 Lac to Rs 10 Lac 15%
Rs 10 Lac to Rs 12.5 Lac 20%
Rs 12.5 Lac to Rs 15 Lac 25%
Rs 15 Lac and above 30%

 

The amount of tax will depend on the 4% education and health cess.

An individual taxpayer choosing the new tax scheme will have to let go of the following deductions and exemptions:

  • HRA (House Rent Allowance)
  • LTA (Leave Travel Allowance)
  • Relocation allowance
  • Professional Tax
  • Housing loan interest (Section 24)
  • Education allowance
  • Helper allowance
  • Special allowances [Section 10 (14)]
  • Standard deductions
  • Chapter VI-A deduction (Except section 80CCD(2) and 80JJA)
  • Conveyance
  • Daily expenses during the employment term

Calculate accurate in-hand salary with the help of our free take-home salary calculator.

Step 4: Calculating Net Salary

Net Salary = Basic Salary + Actual HRA + Special Allowance – Income Tax – Employer’s PF Contribution (EPF)

We are going to take an example to demonstrate how to calculate take-home salary:

Example of Calculate take-home salary

Let’s take an example to understand how to calculate take-home salary:

Karan’s CTC is Rs. 16,00,000. Other salary components of her salary structure are mentioned below:

SALARY COMPONENTS
AMOUNT (ANNUAL)
AMOUNT (MONTHLY)
CTC 16,00,000
Basic 6,40,000 53,332
HRA 3,20,000 26,666
EPF 21,600 1,800
Sec 80C Investment 1,00,000 8,333
Leave Travel Allowance 20,000 1,666
Special Allowance 5,75,324 47,943
Gratuity 23,076 1,923
Professional Tax 2400 200

 

Note:

*This is up to Karan to decide how much she wants to invest and claim under section 80C. So, the maximum deduction possible is 1,50,000. EPF amount also comes under section 80C.

Now, we can assume that Karan pays INR 30,000 per month as her rent.

DA is assumed to be zero because Karan is a private-sector employee.

Step 1: Calculating gross salary

Gross Salary = CTC – (EPF + Gratuity)

16,00,000 – (21,600 + 23,076) = Gross salary

Gross Salary = INR 15,55,324

Step 2: Calculating taxable income

First, calculate the HRA deduction that you can claim:

HRA that you can claim

= Minimum of (Actual HRA, Rent paid – 10% of basic, 50% of Basic for the metro city)

= Minimum (3,20,000 , 3,60,000 – 10% of 6,40,000, 50% of 6,40,000)

= Minimum (3,20,000, 2,96,000, 3,20,000)

= 2,96,000

Taxable Income = Gross Salary – Section 80C deduction – Standard Deduction – HRA – Professional Tax

15,55,324 – 1,000,00 – 50,000 – 2,96,000 – 2,400 = Taxable Income

Taxable Income = 11,06,924

Step 3: Calculate income tax

Based on the slab rates announced in the FY 2019-20:

Income Tax = 112500 + 30% of (Taxable Income – 100000)

112500 + 30% of 1,06,924 = Income Tax

Income Tax = 1,87,347

Cess = 4% of Income Tax

Net Tax = 1,87,347 + 7494= 1,94,841

Step 4: Calculating in-hand/take-home salary

Gross Salary – (Income Tax + Professional Tax) = Take Home Salary

15,55,324 – (1,94,841 + 2,400) = Take Home Salary

Take Home Salary (Annual) = INR 13,58,540

Take Home Salary (Monthly) = INR 1,13,212

Salary Breakup FAQs

Q1. What is a salary slip?

Ans: A salary slip, also known as a payslip, is a document containing an employee’s salary details, including basic pay, bonuses, deductions, etc., given to the employee by the employer each month. The recipients receive hard or soft copies and sometimes both.

Q2. What is gratuity, and how can I calculate it?

Ans: Under The Payment of Gratuity Act, 1972, when an employee leaves the company, they are to receive a one-time gratuity. And for this to happen, the employer will deduct fifteen days’ wages of the employee’s CTC each year. However, the employee can receive this bonus only after five years. Nevertheless, in case of the employee’s death or disability caused by an accident or illness, the gratuity must be given to him, regardless of the number of years.

To calculate gratuity, use the formula below:

Gratuity = [ (Basic salary per month + D.A) x 15 days x Number of years of service ] / 26

Q3. Differentiate between CTC and in-hand salary.

Ans: CTC is the monthly or annual amount of money that employers spend on an employee, including the employee’s basic salary, allowances such as Medical Allowance, Leave travel allowance (LTA), Reimbursements, Conveyance Allowance, bonus, etc., and deductions such as Tax Deductible at Source (TDS), Gratuity, Provident Fund (PF) and Professional Tax.

On the other hand, an in-hand salary is an amount an employee receives after adding allowances, incentives, bonuses, etc. and the deducting Tax Deductible at Source (TDS) and Provident Fund (PF) Or Employer Provident fund (EPF), and other deductions as per the company policy.

Q4. Why is Form 16/16A important?

Both Form 16 and 16A are important as these certificates allow employees and employers to understand detailed transactions TDS / TCS between the deductee and the deductor.

Q5. What are the 2 types of salary structures?

In India, employers follow two types of salary structures:
Bottom-Up: In this type of salary structure, employers accumulate the employee’s total gross salary and then divide the components.
Top-Up: In this type of salary structure, employers mention the different components of the salary and then add up the total gross salary.

Q6. What is the difference between a Financial Year and an Assessment Year?

A Financial Year (FY) starts on the 1st of April of every year and ends on the 31st of March of the next year; hence, this duration is known for accounting and taxing purposes. For those who want to file their Income Tax returns, the FY would be the year before. For instance, if you want to file your IT return in 2022, the FY would be 2021-2022.

An Assessment Year (AY) is the year succeeding the FY. It is when people file for their Income Tax Returns. For instance, if you earned your income in FY 2021-2022, it will become taxable in 2022-2023.

The table below shows examples of Income Year, Financial Year and Assessment Year.

Income Year
Financial Year
Assessment Year
2020-2021 2020-2021 2021-2022
2022-2023 2022-2023 2023-2024

 

Understanding the breakup of a salary slip will help you greatly in your professional life and so we hope this article helps you in comprehending the components of a salary breakup.

We shall leave you here with our best wishes!

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