What Is Salary Breakup? Why It Is Important To Know

Updated 14 December 2022

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Salary is the amount an employee receives at the end of every month against their service rendered to the company. An employer fixes the salary based on a pre-defined salary structure that includes various components. Understanding the salary breakup can help you know the net salary being offered to you and the amount of taxes you are liable to pay. In this article, we discuss what is salary breakup, find out the various components of salary breakup, tax slab and tax rates, related FAQs and some formulas to calculate gross salary and net salary.

What Is Salary Breakup?

To understand what is salary breakup is, it is necessary to understand the salary structure and its various components. An employee receives a salary from the company or organisation. Salary breakup is the analysis of gross salary or cost to company (CTC) to get each component of salary. The in-hand salary of an employee is usually different from the gross salary.

Components Of Salary Breakup

The salary of an employee can vary from company to company, but the salary structure is almost the same across the country. Salary breakup includes various terms as a part of the salary paid to an employee. Components of salary breakup are:

Cost to company

Cost to company or CTC is the sum total of money spent by a company monthly or annually on an employee. CTC comprises several components that are not part of the in-hand salary. It is inclusive of components such as basic pay, provident fund, allowances, bonuses and taxes. The allowances may comprise house rent, travel cost or cab services, free meals and coffee, family health insurances, stocks and other services offered by the company. Generally, the in-hand salary is less than the CTC. The CTC can be calculated with the following formula:

CTC = gross salary + employee provident fund + gratuity

Basic salary

The basic salary is a fixed base income of an employee. It is the base salary of a salaried individual without any addition, such as allowances or bonuses and deductions, such as income tax. It is a stable component and forms the core of a salary structure. Variables of the basic salary are hiring organisation, job profile, candidate's experience and knowledge. Typically, the base pay is 40 to 60 per cent of the CTC.

Allowances

The allowances are the specific amount of money allotted to an employee for certain particular purposes. It is the benefits company offers to the employee over their basic salary. The allowances may include house rent allowance, conveyance allowance, dearness allowance, medical allowance and other benefits the company provides.

Following are some common types of allowances offered by the company:

House rent allowance (HRA): HRA is a component of salary breakup. It is an allowance paid by the company to cover the accommodation cost of the employee in the city.
Dearness allowance: It is the living allowance or bonuses the company pays to their employee to cover the effect of inflation and compensate for the increasing cost of living.
Conveyance allowance: Conveyance allowance or travel allowance is the compensation offered by the company against the commute of the employee. Usually, companies provide cab services to cover this allowance.
Leave travel allowance (LTA): The company provides some amount to cover the domestic travel expenses of the employee while travelling on leave is LTA. It does not include food or accommodation expenses during vacation. An employee can claim LTA twice in a defined block year.
Other allowances: Other allowances may include special allowance, entertainment allowance and incentives.

Gross salary

Gross salary is the total amount an employee earned each month or year during their employment. It comprises basic salary and all allowances, bonuses, other differentials and incentives. It is the amount that an employee receives before taxes and deductions. The gross salary can be calculated with the following formula:

Gross Salary = CTC – (EPF + Gratuity)

Employee provident fund

The employee provident fund (EPF) or provident fund (PF) is a government scheme for employees. The employee and the employer give 12 per cent of the basic salary per month in case the basic salary is less than ₹15,000. If the basic pay of an employee is more than ₹15,000, the company can contribute 12 per cent of ₹15,000, i.e. ₹1,800 or 12 per cent of the basic salary per month. The employee can access these aggregate savings either at retirement or at the end of employment with the company.

Gratuity

Gratuity is an amount payable by the company to their employee under the payment of gratuity act 1972. The company offers an amount equal to the salary of 15 days to the employee after a certain period of service, generally five years. The company primarily pays this as an appreciation amount to the employee for serving the company for a considerable time.

Insurance

Most companies give life and health insurance to their employees. The company deducts a small amount towards insurance from the employee's salary every month. The CTC includes this insurance premium from the company but is deducted while calculating the in-hand salary.

Income tax

The company deducts the tax amount according to the tax slab and applicable tax rate from the employees' salaries. It is deducted prior to processing the employee's salary and is a tax deduction at source (TDS). This deduction goes towards the income tax. The company provides Form 16 to their employees to understand the breakup of tax deductions.

The income tax slab and income tax rate for assessment year 2021-22 for the age group less than 60 are:

₹2,50,001-₹5,00,000: 5% above ₹2,50,000
₹5,00,001-₹7,50,000: ₹12,500 + 10% above ₹5,00,000
₹7,50,001-₹10,00,000: ₹37,500 + 15% above ₹7,50,000
₹10,00,001-₹12,50,000: ₹75,000 + 20% above ₹10,00,000
₹12,50,001-₹15,00,000: ₹1,25,000 + 25% above ₹12,50,000
Above ₹15,00,000: ₹1,87,500 + 30% above ₹15,00,000

Professional tax

The state government charges a maximum of ₹2,500 as a professional tax. This tax applies to any income earned by an individual. The professional tax may vary from state to state. As per section 16 (iii) of the Income Tax Act 1961, an employer can deduct professional tax from the gross salary of an employee. The professional tax does not apply to the states and union territories, including Delhi, Arunachal Pradesh, Punjab, Haryana, Uttarakhand, Rajasthan, Uttar Pradesh, Nagaland, Andaman and Nicobar, Dadra and Nagar Haveli, Daman and Diu, Goa, Himachal Pradesh, Jammu and Kashmir, and Lakshadweep.

Net salary/in-hand salary

Net salary, in-hand salary, or take-home salary is the total amount of money an employee receives in their account. The net salary is the cumulative salary calculated after any add-on, such as allowances, bonuses, incentives and deductions such as PF, income tax, professional tax. This is the final amount employees bring home. It differs from one company to another depending on the basic salary and types of allowances. Few companies offer some allowance in the form of money, which also contributes to the net salary. The net salary can be calculated with the following formula:

Net salary = Gross salary – EPF – Income tax – Professional tax

FAQs Related To Salary Breakup

Following are some FAQs related to the salary breakup:

What is a payslip or salary slip?

A payslip or salary slip is a document provided by the company every month as a statement of payment received by the employee. It includes all the components of salary breakup—a payslip issued in both soft and hard copies that serves as proof of payment. In case the employee identity card is inaccessible, the payslip also acts as employee ID proof. Payslips also help in getting loans and credit cards.

What is TDS?

Tax deduction at source or TDS refers to the deduction of a certain amount as tax prior to processing the payment to the employee. The company deducts the taxes at the source on behalf of the employee who is liable to pay taxes and remit those taxes to the government's account. In the case of a salaried employee, the employer deducts tax at source according to the Income Tax Act, 1961. An employee can claim some amount of TDS by filing an income tax return for that assessment year.

Why Form 16 is important?

Form 16 acts as proof that the employee paid the taxes on time. It confirms that the income of the employee is valid, genuine and recorded with the government. Form 16 include the detail of tax deduction and helps in filing correct income tax returns.

What is the difference between CTC and in-hand salary?

The amount the employee receives in their account differs from the CTC. It is the total expenditure of the company on an employee, including basic pay, bonuses, allowances, incentives and EPF. Whereas the in-hand salary is the amount of money an employee takes home after adding allowances and bonuses and TDS.