31 Jul 3 Tips to Understand Your Payslip: A Comprehensive Guide to the Indian Payroll System
What is a payslip?
A payslip, also known as a salary slip or pay stub, in the Indian payroll system, is a document that an employer provides to an employee each month, showing the detailed breakdown of the employee’s earnings and deductions for that particular pay period.
It typically includes the following information:
Employee Information in the payslip.
This includes details such as the employee’s name, employee ID, position, and department.
This often includes the company name and address.
The specific time period for which the employee is being paid.
This includes all forms of pay the employee is receiving. It may include:
The fixed amount paid to an employee before any extras are added or taken off.
Dearness Allowance (DA):
A cost of living adjustment allowance.
House Rent Allowance (HRA):
An allowance given by an employer to an employee to meet the cost of renting a home.
Other allowances: This could include conveyance allowance, medical allowance, special allowance etc.
Deductions in the payslip
These are amounts subtracted from the employee’s gross income to determine their net income. They may include:
Provident Fund (PF):
A mandatory contribution fund that is contributed to by both the employee and employer.
Professional Tax (PT):
This is the tax charged by the state governments in India.
Tax Deducted at Source (TDS):
This is income tax that an employer deducts from the salary of the employees and pays to the government on their behalf.
This could include loan repayment, advance salary repayment etc.
Net Pay in the pay slip
This is the final amount received by the employee after all deductions have been made from the gross salary.
What is Dearness Allowance (DA)?
Dearness Allowance (DA) is a specific component of salary in India designed to mitigate the impact of inflation on salaried individuals. It is calculated as a percentage of the basic salary to moderate the cost of living. The government and many companies in India use it as a tool to adjust the cost of living changes against inflation.
The percentage of DA varies according to the inflation rate, and it is revised twice a year in January and July for central government employees. For public sector employees, it is revised quarterly.
It’s important to note that the DA is a fully taxable component of salary in India. The amount of DA that an employee receives can significantly impact their take-home pay, especially during times of high inflation.
The calculation of the dearness allowance takes into account the All India Consumer Price Index (Industrial Workers) data. In the case of central government employees, the DA is now calculated as per the 7th Central Pay Commission which takes into account inflation in the prices of commodities.
DA is also applicable to pensioners. Central Government pensioners receive dearness relief, which is the equivalent of DA, to help offset the impact of inflation on their fixed monthly pension.
What is House Rent Allowance (HRA)?
House Rent Allowance (HRA) is a major component of a salaried individual’s total salary in India. It’s provided by an employer to an employee to cover the expenses related to rented accommodation.
The HRA is beneficial to employees from a tax perspective. The Income Tax Act of India allows for tax exemptions on the HRA, subject to certain conditions. The exemption on HRA will be the least of the following amounts:
- Actual HRA received.
- 50% of salary (basic + dearness allowance) for those living in metro cities (Delhi, Mumbai, Chennai, Kolkata) or 40% for those living in non-metro cities.
- Rent paid in excess of 10% of salary.
Here, ‘salary’ is defined as the sum of basic salary and any fixed commissions or other amounts.
To claim the HRA exemption, the employee needs to provide rental receipts and/or a rental agreement as proof of rental expenses. If the rent paid per annum exceeds a certain limit (1 lakh INR as of my knowledge cutoff in 2021), then the Permanent Account Number (PAN) of the landlord is also required.
It’s important to note that if an employee lives in their own house or does not pay rent, the HRA received from the employer is fully taxable.
However, tax laws and regulations can change, and it’s always best to consult with a tax advisor or use online resources to get the most recent information.
What is Provident Fund (PF)?
Provident Fund (PF), or Employees’ Provident Fund (EPF), in India is a government-managed retirement benefits scheme, under the auspices of the Employees’ Provident Fund Organisation (EPFO), a statutory body under the Ministry of Labour & Employment.
This system is designed as a savings platform for employees to help them accumulate funds for retirement. The system is applicable to employees of establishments with 20 or more persons, and certain other employees specified by the Central Government by notification in the Official Gazette.
Here’s how it works:
Both the employee and the employer contribute a certain percentage of the employee’s basic salary (plus dearness allowance, if any) towards the EPF. As of my knowledge cutoff in 2021, this is usually 12% from both parties. The employee’s contribution is fully directed towards the EPF, while out of the employer’s contribution, 8.33% is diverted to the Employees’ Pension Scheme (EPS), and the remainder goes to the EPF.
The EPFO declares an interest rate every year, under the regulation of the government. The contributions accumulate with interest, which is compounded annually.
The accumulated sum can be withdrawn upon retirement or under certain conditions specified by the EPFO, such as unemployment, illness, marriage, or purchase/construction of a house.
Contributions towards EPF are eligible for tax deductions under Section 80C of the Income Tax Act, up to a limit specified by the government. The interest earned and the eventual amount received upon withdrawal after the specified period (usually five years) are exempt from income tax.
Professional Tax (PT)?
Professional Tax (PT) is a type of tax that is levied by the state governments in India. It is imposed on individuals earning an income from salary or anyone practicing a profession such as chartered accountant, company secretary, lawyer, doctor, etc. The tax is levied based on the income slabs set by the respective state governments, and the maximum amount that can be imposed as professional tax is INR 2,500 per year.
The professional tax is deducted from an employee’s salary by their employer and is then remitted to the state government. For self-employed individuals or professionals, they are responsible for calculating and paying this tax themselves.
The states that currently do not impose professional tax are: Delhi, Haryana, Himachal Pradesh, Punjab, Rajasthan, Uttar Pradesh, and Uttarakhand.
This tax is also allowed as a deduction under the Income Tax Act, 1961 and can be deducted from the taxable income.
It’s important to note that professional tax regulations and rates vary from state to state in India, and they are subject to change over time. Therefore, it’s recommended to check the most current regulations in the respective state or consult with a tax advisor for the most accurate information.
What is Tax Deducted at Source (TDS) on Salary?
Tax Deducted at Source (TDS) is one of the ways the Government of India collects income tax. As the name suggests, TDS is the amount of tax that is deducted by the payer (employer, in case of employment income) of your income rather than the receiver (employee). This is applicable to various income sources such as salary, commission, rent, interest from bank deposits, etc.
The entity or person making the payment (Employer in the case of salary) is responsible for deducting the tax at source and depositing it to the Indian Government on behalf of the payee (Employee). The tax is deducted based on the income tax slab rates applicable to the payee’s income.
Here are some key aspects about TDS:
When making payments under various heads, the employer is required to deduct TDS according to the rates specified by the tax laws.
After deducting the TDS, the deductor has to deposit the tax to the government. The deductor should then file a TDS return detailing all transactions related to TDS for a quarter.
After the TDS return is filed, a TDS certificate is issued by the deductor to the deductee, which acts as proof of submission of TDS. In case of salary, this is Form 16, which is issued annually.
Once the TDS has been deducted and paid to the government, the deductee can claim this amount as a tax credit while filing their income tax return. This is done by providing the details mentioned in the TDS certificate.
It’s worth mentioning that if an individual’s total income is below the taxable limit, they can ask for non-deduction of TDS by submitting Form 15G/15H, as applicable, to their deductor.
Remember, the rates for TDS and the income categories it applies to can change based on new government budgets and regulations. Hence, it’s always a good idea to consult a tax advisor or refer to the most recent government resources for the most accurate information.
The payslip is a very important document for employees as it provides a clear idea about their salary structure, helps in income tax planning, is used as proof of employment income when applying for a loan or visa, and helps in resolving issues with the employer over salary discrepancies.