Any salary slip has two major components: earnings/incomes and deductions.
The earnings or incomes record the salary being earned and any other allowances, bonuses or gains that form an employees income. Few major components of incomes or earnings are:
- Basic Salary; forms the most essential component, making up 35-40% of your entire salary. And, it is the basic salary that is used to calculate DA, PF & ESI contributions.
- Dearness Allowance (DA); was introduced by the government to help employee reduce the impact of inflation and is often 5% of your employee’s basic salary.
- House Rent Allowance (HRA); is a benefit given to employees residing in rented houses. The percentage of HRA is dependent on the city of an employee. For an employee in a metro city, HRA is 50% of the basic salary and 40% in case, the employee is in a non-metro city.
- Conveyance Allowance (CA); to cover your employees travel expenses from home to work and back.
- Leave Travel Allowance (LTA); allows your employees to reimburse the amount they spend on travel during vacation. However, it only covers the travel expenses within the country.
- Medical Allowance (MA); is the reimbursement of medical expenses employee had to bear during the term of employment.
- Performance Bonus and Special Allowance; is primarily the final component that is added to the salary structure after all other components have been exhausted.
- Other Allowance; cover reimbursement of other miscellaneous costs that the employee had to bear during the term of the employment like the phone bill.
Deduction components are those components that are mandatorily deducted from an employees salary towards taxes – TDS and PT – and forced savings – PF and ESI. The major components appearing under deductions are:
- Provident Fund (PF); is calculated at 12% of the basic salary + DA and both, employee and employer must contribute 6% towards PF. PF is applicable to all organizations with 20+ employees and is a mandatory deduction for employees whose basic + DA + bonus or special allowances are less than INR 15,000.
- Employee State Insurance (ESI); contributions are made by the employee – 1.75% of gross salary – and employer – 4.75% of gross salary. ESI is mandatory for all organization with 20+ employees and is a mandatory deduction for employees whose gross salary is less than INR 21,000.
- Professional Tax (PT); is a state tax that salaried employees need to pay and varies from one state to another.
- Tax Deduction at Source (TDS); is the tax deduction by the employer on behalf of the Income Tax Department from employee’s salary based on the tax slab of the employee.