PAY SLIP ANALYSIS

Salary Slip
A salary slip is a document issued by an employer to an employee. It contains a detailed
description of the employee’s salary components like HRA, LTA, Bonus paid etc and
deductions for a specified time period, usually a month. It may be issued on paper or mailed
to the employee. Employers are legally bound to issue salary slips to their employees
periodically, as proof of salary payments to employees and deductions made.
 

Importance of a Salary Slip

a.  A basis for Income Tax payment

The salary slip forms the basis for income tax calculation. It helps to prepare the income tax
returns and determine how much tax is to be paid or how much refund is to be claimed by the
employee for the year.

b. Provides access to various facilities

The salary slip gives employees access to various free or subsidised facilities provided by the
government such as medical care, subsidised food grains, etc.

c.  Helps borrow

Salary slips provide lenders with assurance that their lendings will be repaid. It is an
important document to avail loans, credit, mortgage and other borrowings.

d. Helps assess offers

Employees can compare offers from new employers based on their previous salary slips. It
also helps them negotiate salary with new employers or for new roles.

e.  Proof of employment

Salary slips are important legal evidence of employment. Often, while applying for travel
visas or to universities, applicants are asked to furnish a copy of their salary slip as proof of
employment and designation.

Components of a Salary Slip

Components of a salary slip can be understood in two parts:

1. Incomes
The following components appear under the incomes part of the salary slip:
i. Basic Salary It is the most important component of salary and usually comprises
about 35% to 40% of the total salary. It is the basis for determination of various other
components of the pay slip.
ii. Dearness Allowance It is an allowance paid to reduce the impact of inflation on the
employee. 
iii. House Rent Allowance (HRA) HRA is an allowance paid to employees for house
rent paid by them. HRA is based on the location of the rented house and is usually
about 40% to 50% of basic salary. 
iv. Conveyance Allowance  It is an allowance to cover cost of travel from home to
work and from work to home.
v. Leave Travel Allowance It is an allowance to cover the cost of travel of employees
and their immediate family members while on leave. 
vi. Medical Allowance It is an allowance to cover the medical expenses of the employee
while in employment. 
vii. Performance Bonus and Special Allowance It is usually given to employees as a
mode of encouragement.
viii. Other Allowances There may be various other allowances paid by employers to
employees for different purposes. They are covered here. Employers may choose to
categorise these allowances in a separate head, or club them together under ‘Other
Allowances’.

2. Deductions
The following components appear under the deductions part of the payslip:

i. Provident Fund PF is a compulsory contribution by the employee towards a PF

account help in his name with certain exceptions. 
ii. Professional Tax It is a tax payable based on the employee’s tax slab and is
applicable only in a few states in India. 
iii. Tax Deductible at Source TDS is deducted by the employer on behalf of the income
tax department from employee’s salary based on the tax slab of the employee after
considering other factors.