How To Understand Your Salary Structure

Landing a new job or to get promoted is an incredibly satisfying feeling. But getting a hold on what makes up your salary can be painful for many. Several salaried people admit they have little understanding of their salary. Here is an attempt to give you a sense of how to understand your salary structure.

Most salaried individuals will have an income with the following components—basic salary, allowances, reimbursements, bonus and contributions.

Basic salary:

It is a fixed component in your paycheck and forms the basis of other parts of your salary, hence the name. Some of the allowances may be defined as a percentage of your basic salary. For instance, your provident fund is deducted at 12% of your basic salary. Every time you get a raise, this is an important number to watch as other components may be based on it. This amount is fully taxable.

Allowances:

Allowances form a major part of your total salary. These may be further broken up into house rent allowance (HRA), leave travel allowance (LTA), overtime allowance or simply a special allowance. You can save tax on HRA if you live on rent. To get tax benefit, you must have rent receipts, a rent agreement and proof of payments made to the landlord.

Tax can be saved on HRA to the extent rent is paid; a formula is prescribed to calculate how much of HRA will be tax-free and how much will be taxable. You can also pay rent to your parents if you live with them, but you must actually pay rent, which must be included in your parents’ taxable income. The employer is free to structure your HRA amount, so if you are paying high rent, you may ask for a higher HRA to allow maximum benefit.

LTA is the allowance paid to cover expenses of a vacation you take. Remember that travel within India is eligible. Exemption is available only on the actual travel cost—the money spent on air; rail or bus fare is eligible. An employer fixes the amount eligible under this head and may also set rules regarding leave to allow tax saving on this. If you do not make a trip, this amount is paid to you after deducting tax. Any allowance under the subhead special or overtime or meal allowances is all fully taxable.

Reimbursements:

Your employer may allow you to claim certain expenses which you have made purely for the company or in pursuit of your job with the company.

Reimbursement of official phone calls, taxi trips for travel to client locations, meals at client location or hotel stay for official trips. These reimbursements are usually on actual basis and payment is made to you after you submit the bills. This reimbursement is not taxable for you.

Perquisites:

In addition to salary, some employees may get other benefits such as a company car, an interest-free loan, and subsidized education for kids, etc. The monetary value of these perquisites is added to the salary and tax has to be paid on them by the employee. Examples are rent-free house, car or driver for personal use and foreign vacations. Gifts up to Rs5,000 in a year are exempt, but anything in excess will also be included in the salary of the employee.

Bonus:

This amount is fully taxable. It may be fixed or variable.

Contributions:

The most common contribution you make is towards your employee provident fund (EPF). Do note that it is a mandatory contribution and is usually 12% of your basic salary or a minimum amount of Rs1,800. You have to make an equal contribution, but you may choose to contribute higher percentage of your basic by making a declaration to your employer. 

EPF works very much like PPF, basically the contributions accumulate, the government pays interest and this interest is not taxable. Withdrawals, though, come with restrictions. You may also enroll for a medical insurance scheme from your office and deductions are made from your salary for it.