Assignment #1

Submitted by: Afaq Anwar

70078748
Submitted to: Sir Kaleem
Reward and Compensation
Topic: Components and heads in a Salary Slip?
Sample salary slip

Components in a Salary Slip:

Incomes;
The income part of the salary slip has a basic salary and allowances. The same is explained
below.

Basic;
Basic, as the name suggests, is the basic component of the salary. It constitutes 35-50% of the
salary. It forms the basis of other components of the salary. At junior levels, the basic tends to
be high. As the employee grows in the organization, other allowances tend to be higher.
Organizations tend to keep basic low so that the allowance pay won’t be topped. The salary is
100% taxable in the hands of the employee. Basic is the first component on the earnings side
of the salary slip.
Dearness Allowance;
Dearness Allowance paid to offset the impact of inflation on one’s pay. It is usually 30-40% of
the basic pay. Dearness allowances da is directly based on the cost of living. Hence it is
different for different locations. For income tax, basic and DA are considered as pay. Therefore,
it is taxable. It appears in the earnings side of the pay slip right after the basic pay.

House Rent Allowance;

House Rent Allowance (HRA) is given to employees living in rented facilities. The HRA
depends on the city of residence of the employee. For a metro city, HRA is 50% of the basic
pay. For all other cities, it is 40% of the basic pay. Since housing rent allowance is an
allowance, it is exempted from tax up to a specific limit, provided the employee pays the rent.
It appears in the earnings side of the salary slip. One can save income tax on HRA. The
exemption is the minimum of the following:

• Rent paid annually minus ten percent of the pay (basic + DA)
• Actual HRA received
• 50% of (basic + dearness allowance da) in case the location is (or 40% of (basic +
dearness allowance da) in case of other cities.

Conveyance Allowance;
Conveyance Allowance is the amount an employer pays an employee to travel to and from
work. It is an allowance. Hence is exempt from tax up to a specific limit. It appears in the
earnings side of the salary slip. One can save income tax on conveyance allowance. The
exemption is the minimum of the following:

• 1600 per month

• Actual conveyance allowance received

Medical Allowance;
Medical Allowance is the amount an employer pays to an employee for medical expenses
during the term of the employment. One can save income tax on medical allowance. However,
the employee only receives this amount on the submission of medical bills as proof. If the
employee fails to submit evidence of medical bills, he/she will receive the allowance, but it
will be fully taxed. In case the proof is provided, the allowance up to 15,000 is only exempt
from tax. It appears in the earnings side of the salary slip.
Leave Travel Allowance;
It’s given by employers to cover the cost of employee travel while on leave. It includes the
travel expenses of the employee’s immediate family members as well. Proof of the journey is
required to avail deduction subject to certain limits. Any expenses incurred during the trip apart
from travel do not count towards the leave travel allowance tax exemption.

Special Allowance in Salary;

Special allowances include performance-based allowances. These are usually given to
encourage employees to work better. Also, these allowances vary from company to company.
Special allowances are 100% taxable. It appears in the earnings side of the salary slip.

Deductions;
The deduction part of the salary slip has the professional tax, TDS and EPF. The same is
explained below.

Professional Tax;
Professional tax is a small tax levied by governments on earing professionals. It is not only
levied on professionals but to anyone who earns a living through a medium. This amount is
deducted from the taxable income. Also, it usually amounts to just a few hundred rupees each
month and is subject to the gross tax slab. It appears on the deductions side of the salary slip.

Tax Deducted at Source;

It is the amount deducted by the employer on behalf of the income tax department. It is based
on the gross tax slab of the employee. One can reduce this amount by investing in tax-exempt
investments like equity funds (ELSS), PPF, NPS, and tax-saving FDs. It appears on the
deductions side of the salary slip. Hence, investing in section 80C instruments of the Income
Tax Act increases your take home salary.

Employee Provident Fund (EPF);

It is the contribution of the employee to the provident fund. This qualifies for section 80C of
the Income Tax Act. Provident fund is the accumulation of funds for employee’s retirement
period. The Employees’ Provident Fund Organisation governs it. 12% of the employee’s basic
salary goes towards EPF. The employer also makes a similar contribution on behalf of the
employees for their retirement.

Gross Salary;
It is the amount before deductions of taxes and others. However, it is inclusive of bonuses,
overtime, etc. While Charan’s gross salary is 5,50,000 – 21,600
Gross Salary = 5,28,400. The net pay is calculated on this amount.