A salary slip or a payslip is an essential document for an employee. It contains the breakup of your salary. Your employer issues a salary slip before the salary gets credited in your bank account. In this article, we discuss the details, importance and format of salary slip.
What is a salary slip?
A salary slip is a formal document that your employer issues to you every month to let you know the details of your pay package, which includes deductions and your take-home salary. A salary slip contains different elements of your wage, such as the basic salary, house rent allowance (HRA), dearness allowance (DA) and performance-based incentives. It also includes the items deducted from your paycheck, such as the provident fund (PF), professional tax and tax deducted at source (TDS).
The salary slip is legal proof of your wage. New employers, banks, credit card companies and income tax departments often ask for your salary slips. It is an essential document to apply for loans.
Importance of a salary slip
Salary slips are essential for various reasons. Following are some of the significant benefits you get from them:
Your salary slip serves as a legal proof of employment
A salary slip is a legal proof of your employment, designation and the amount of your monthly salary. When you seek admission into higher education programs in global universities, they often ask you to furnish employment details supported by your monthly salary slips. Salary slips are also helpful while applying for work permits because they serve as your income proof.
A salary slip helps in job search and negotiation
When you are looking for a job change, some employers may ask you for salary slips from your previous company as proof of your designation and existing salary. Salary slips might help you negotiate to get a higher position and compensation with a new company based on your current designation and salary.
Read more: Salary Negotiation Tips and Examples
Salary slips are useful in applications for loans and credit cards
When you apply for a loan or credit card, the lender or the credit card company assesses your creditworthiness based on your salary slips of the previous three to six months. The salary slips indicate your net take-home pay every month and your ability to meet your repayment obligations. The initial loan and credit card limits depend on your salary slip figures. Many banks and financial companies offer personal loans and salary advances to salaried individuals solely based on their salary slips.
Salary slips help in filing income tax returns
Salary slips contain detailed components of your salary, so you need to get the cumulative figures for these components for the relevant financial year. If your company provides the aggregate statistics each month, you need to refer to the last salary slip of the year (ending on March 31) to compute your tax liability. If you don't have combined figures in a single salary slip, all you need to do is to add up the monthly figures to get the annual values.
Once you get the annual values of your basic pay, HRA, DA and conveyance allowance, you can calculate your tax liability. In the case of most allowances, you can claim a deduction to the extent of actual expenses. Your salary slip will also have the amount of tax deducted at source, if any. If your total tax liability is less than the amount of tax already deducted, you can claim a refund of the excess amount paid.
Your salary slip lets you know your provident fund contribution
Almost all the big companies are liable to deduct a certain percentage of their employees' salary for provident fund contribution. Employers also contribute to this fund. When you retire or move to another company, you can either withdraw or get your funds transferred to the new company. Your salary slips give you an idea of the amount of contribution you are making every month.
Salary slips give access to government-sponsored welfare schemes
Most of the state-sponsored welfare schemes such as subsidised food grains and medical facilities depend on the income of the recipient. As a salaried individual, you can use your salary slip to support your income, claim and avail these schemes.
Salary slip components
A salary slip breaks down your salary into its constituents. These factors fall into two broad categories, namely income and deductions:
Salary slips from most of the employers in India include the following income components:
- Basic salary: Basic salary is the main component of your salary slip. Most employers compute other factors as a percentage of your basic salary. It's a fixed part of your salary, and it usually comprises up to 50% of your take-home pay. Basic salary is fully taxable subject to income tax policies. Therefore, companies try to keep the basic income low to help employees save tax.
- Dearness allowance (DA): DA is the allowance given to meet the higher cost of living. It forms a part of your take-home pay and is fully taxable. The DA component may vary among employees depending upon the inflation prevailing in their locality.
- House rent allowance (HRA): HRA intends to reimburse your monthly rent if you are living in a rented house. It usually comprises up to 50% of your basic pay in big cities like Delhi, Mumbai, Kolkata and Chennai and up to 40% in small towns. The maximum amount of exemption you can claim is limited to the extent of actual house rent paid because it is similar to reimbursement.
- Conveyance allowance: Conveyance or travel allowance covers the cost of travel between your home and office. It forms a part of your take-home pay and is exempt from income tax up to a specific limit.
- Leave travel allowance (LTA): LTA covers your travel expenses during the approved leave. It is exempt from tax, subject to certain limits and conditions. You need to submit proof of travel to claim your LTA.
- Medical allowance: You can claim medical allowance by submitting supporting documents for expenses incurred on medical care and treatment during your employment with the company. It is exempt from income tax up to the specified ceiling amount.
- Bonus and special allowances: These are variable components of your salary paid periodically based on your performance and other parameters to keep you motivated. Bonus and all other performance-based allowances are fully taxable. They form part of your take-home pay.
- Other allowances: Your employer may pay other allowances like meals allowance or city compensatory allowance (CCA). Many companies issue monthly coupons for buying food and groceries. The monetary value of such coupons forms a part of your salary.
Following are the typical components falling under the deductions section of your salary slip:
- Provident fund (PF): This is the mandatory contribution companies deduct from your salary and deposit in your provident fund account along with the employer's contribution. You can take your provident fund balance with you when you move to a new company. The amount of provident fund deducted from your salary is exempt from income tax.
- Professional tax: Most of the states in India levy a professional tax on salaried and self-employed professionals. Companies deduct this tax from your salary and deposit it with the government. The actual amount deducted depends upon the tax rates applicable on your income slab in your state.
- Tax deducted at source (TDS): This is the advance tax deducted from your salary and deposited with the income tax department. If your annual income does not exceed taxable limits, you can submit Form 15G with your employer to prevent any tax deduction at source. You should deduct the amount of TDS from your total tax liability and only pay the balance while filing your tax return. If the amount of TDS is more than your total tax liability, you can claim a refund.
Simple salary slip template
Every company has its own salary slip format. However, subheads remain similar in most of the cases. Here is a simple salary slip format given for your easy understanding:
Salary Slip for [Month] [Year]
[Date of joining]
[Bank Account No.]
Manual vs. digital salary slips
While most employers have switched over to digital salary slips, many companies still use manual salary slips. Both versions are similar. However, a digital salary slip does not require a signature and a company stamp. Companies may either send digital salary slips through email or allow employees to download them from their portal. Digital salary slips make it easy to store and take a printout any time you need to. Manual and digital salary slips are legally valid and enforceable in the court of law.
If your employer does not have a practice of issuing salary slips and you need one, you can request it from your company.