The compensation employees receive at the end of each month for their work for the company is known as salary. Employers set salaries based on pre-established wage structures with various components. Knowing the net salary being provided to you and the amount of taxes you must pay can be determined by understanding the salary breakup.
In this article, we define salary breakup, examine its various elements, tax brackets and rates, relevant frequently asked questions, and some formulae for calculating gross and net salaries.
What is a salary breakup?
Understanding the salary structure and all of its components is essential to comprehend what salary breakup is. A salary is given to an employee by the business or organisation. The examination of gross compensation or the cost to the company (CTC) to obtain each salary component is known as salary breakup. Employees’ in-hand pay typically differs from their gross salary.
Salary breakup components
Although an employee’s pay can vary from company to firm, the salary structure is essentially the same throughout the nation. Different words are included in the salary breakdown as part of the compensation given to an employee. Indicators of salary breakup include:
Cost to company
The total amount of money a business spends on a worker monthly or yearly is known as the cost to the company (CTC). The CTC comprises several elements that are not included in the in-hand pay. It contains basic pay, a provident fund, perks, bonuses, and taxes. The benefits could include stock options, complimentary lunches and coffee, family health insurance, travel expenses or cab services, and other company-provided amenities. Usually, the in-hand pay is less than the CTC. The CTC can be calculated using the formula below:
CTC = gross salary + employee provident fund + gratuity
An employee’s base salary is a set source of revenue. It is the salary of a salaried worker, free of any additional compensation like bonuses or allowances and any deductions like income taxes. It is a reliable element that is the foundation of a pay structure. The hiring organisation, job description, candidate experience, and knowledge are all factors that can affect the basic wage. The basic salary ranges from 40% to 60% of the CTC.
The exact sum of money allocated to an employee for a specified reason is known as an allowance. It is the extras that the employer provides to the employee on top of their base pay. The perks offered by the firm may also be included in the allowances, such as housing rent assistance, transportation assistance, dearness assistance, and medical assistance.
The company frequently provides the following categories of allowances:
- HRA, or house rent allowance, is a part of income breakdown. It is a stipend given by the employer to cover the cost of the employee’s lodging in the city.
- The term “dearness allowance” refers to the living allowance or bonuses that an employer gives employees to offset the effects of inflation and the rising cost of living.
- Conveyance allowance, often known as a travel allowance, is the compensation provided by the employer for an employee’s commute. Typically, businesses offer taxi services to pay for this allowance.
- Leave travel allowance, LTA is the term used to describe the amount provided by the employer to cover an employee’s domestic travel costs while on leave. It excludes costs for lodging or meals incurred while on vacation. Within a specified block year, a worker may submit two LTA claims.
- Additional allowances Special allowances, entertainment allowances, and incentives are examples of other compensation.
The sum of an employee’s monthly or annual gross salary is known as their salary. It includes the base pay and all bonuses, differentials, and incentives. It is the amount an employee is paid before taxes and other withholdings. The following formula can be used to determine the gross salary:
Gross Salary = CTC – (EPF + Gratuity)
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Employee provident fund
An employee retirement benefit offered by the employer is a provident fund. Every month, a specific portion of the employee’s basic salary is set aside from their CTC, and the company also contributes a monthly amount to this fund.
After one month without employment, an employee is eligible to withdraw this sum. This component of the company’s retirement benefit programme is typically 12% of the basic salary.
The employee provident fund (EPF) or provident fund (PF) is a government employee programme. If the basic pay is less than 15,000, the employee and the employer each contribute 12% of the monthly salary. If an employee’s base pay is higher than 15,000, the employer can donate 12,000, 1,800, or 12% of the basic monthly income. Employees can access these total savings at retirement or when their work with the organisation ends.
According to the 1972 Payment of Gratuity Act, a corporation may give an employee a gratuity. After a specific amount of time, typically five years, of service, the corporation offers the employee money equal to the wage of 15 days. The primary purpose of this payment by the company is to show the employee its appreciation for their long-term service.
Most businesses offer their employees life and health insurance. The employer deducts a modest sum from the employee’s pay to cover monthly insurance costs. Although it is subtracted from the in-hand income for determining the CTC, the company’s insurance premium is included in the CTC.
The corporation deducts the tax amount per the tax slab and appropriate tax rate from the employee’s salary. A tax deduction at the source is taken out before the employee’s salary is processed (TDS). These savings are applied to your income tax. For employees to understand the breakdown of tax deductions, the corporation gives Form 16.
The state government levies a professional tax with a cap of 2,500. Any money a person earns is subject to this tax. States may have different professional taxes. An employer may subtract an experienced tax from an employee’s gross wage under section 16(iii) of the Income Tax Act of 1961. States and union territories like Delhi, Arunachal Pradesh, Punjab, Haryana, Uttarakhand, Rajasthan, Uttar Pradesh, Nagaland, Andaman & Nicobar, Dadra & Nagar Haveli, Daman & Diu, Goa, Himachal Pradesh, Jammu & Kashmir, and Lakshadweep are exempt from the professional tax.
Net salary/in-hand salary
Employees’ whole money in their bank account is their net salary, in-hand salary, or take-home pay. The total compensation determined after all additions, such as PF, income tax, and professional tax, as well as bonuses, incentives, and allowances, are known as the net salary. This is the total take-home pay for employees. Depending on the budget and the base wage, it varies from company to firm. Few businesses assist in cash, which also affects the net salary. The formula below can be used to determine the net salary:
Net salary = Gross salary – EPF – Income tax – Professional tax
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