What Is Salary Breakup? Understand CTC, Salary Components, And Salary Structure

Salary is the amount of money that an employee receives at the end of every month for the work they have done in that specific month in that organization. The organization fixes the salary based on a predetermined salary structure incorporating different components.

Understanding the salary breakup details in the offer letter can help you know the total salary being provided to you and the tax you are eligible to pay.

In this blog, we will discuss a salary breakup, the difference between a salary and wage, the components of a salary breakup, a salary breakup structure calculator, and ways to save your tax. However, before getting into any of these, let us understand the difference between salary and wages.

Difference Between Salary and Wages

The terms “salary” and “wage” are mainly confused by people and used interchangeably. However, both these terms differ from each other and have different meanings.

Salary is a fixed amount of money provided to the employees at the end of the month for their performance. On the other hand, wages are daily-based or hourly-based payments provided to an individual for work they completed in a day.

Let us get into detail.

Definition of Salary

The term “salary” is the decided amount of money between an employee and the employer that is extended regularly based on one’s performance. Generally, salary is calculated annually.

Usually, salaried persons are doing “white collar office jobs,” which implies that an individual is well-educated, experienced, and working in an esteemed organization.

Definition of Wages

Wage is compensation provided to an individual in return for their total work and time spent. Wages are variable and tend to change with a person’s day-to-day functioning. Wages are usually offered to laborers who work in the manufacturing industry and get payment daily.

The individual who receives wages is known to be doing a “blue-collar labor job,” which indicates that a person is engaged in a semi-skilled or unskilled job and gets wages regularly.

What is a Salary Breakup?

Salary breakup is the detailed structure of an individual’s salary components. A salary breakup consists of components like Basic salary, HRA, conveyance Allowance, Mobile and internet Allowance, LTA, Special Allowance, Provident Fund, etc.

Components of a Salary Breakup

An individual’s salary breakup in offer letter can vary from company to company, but the salary structure is nearly the same across the country. The salary breakup format includes different terms as a part of the salary paid to an employee. A few of the components of salary breakup include:

Basic Salary- The basic salary is the fixed component of a salary, excluding any privileges and benefits. It can vary based on the location of the job, designation, and industry. It accounts for nearly 40-60% of one’s CTC and is taxable. Thus, if one’s basic salary is too high, the outcome will be increased tax and PF liabilities, and on the other hand, if it’s too low, it could violate the minimum wage standards.

understanding salary breakup components

Allowances- Allowance is an amount that is paid to employees during their jobs. It can be fully or partially taxable, based on its type. Allowances offered and their limitations will differ from one company to another, per their policies. The amount of allowance depends on the exclusive policies of the company. Here are a few common forms of allowances:

  • House rent allowance.
  • Leave travel allowance.
  • Special allowance
  • Conveyance allowance
  • Performance bonus

The company offers a performance or statutory bonus to reward an individual’s excellent performance. It is provided in addition to the basic salary and is paid to encourage the employees under the Payment of Bonus Act of 1965. The bonus amount is a percentage of the basic pay, based on the company’s policies.

Employee Provident Fund (EPF)- A provident fund is a retirement benefit the employer provides employees. A certain percentage of the basic pay is dedicated every month from the CTC of the employee, and the same amount is contributed by the employer every month towards this fund.

An employee can withdraw this amount after being unemployed for 1 month. This is a part of the retirement benefit plan of the company and is generally calculated at 12% of the basic salary.

Insurance- Many organizations provide their employees with life health insurance policies to promote the health of their employees. A small amount from one’s salary is deducted from the CTC every month and used to pay the premium.

Form 16- A company issues a Form 16, which includes the details of an employee’s salary and the amount of tax deducted. The taxpayer must submit Form 16 to file the Income Tax returns every financial year. It is considered proof of their tax and income paid to the government. 

Gratuity is the total amount paid to the company’s employees after they complete five years in an organization. As the name indicates, it is the total amount paid in the form of appreciation towards the employee for their hard work and dedication over the years. The gratuity amount is calculated at 4.81% of the total basic pay, according to the Payment of Gratuity Act, 1972.

Reimbursements- Sometimes, employees are entitled to various refunds, including phone bills, medical treatments, newspaper bills, and many more. You will not receive this amount in the salary, but after submitting the bills, you will get reimbursement. Usually, there is an upper limit for each category of refund.

Taxes and Liabilities- After all the allowances, gratuity, PF deduction, and bonus are deducted from one’s salary; the remaining amount is adjusted towards the professional and income tax. The tax due on the compensation is calculated on the applicable slab rates. Employees can choose between the old tax regime and the new tax regime. Here are the tax slabs (new and old regime-23-24).

Source: https://shorturl.at/lmxz9

The amount of tax determined is directly deducted from your salary before it comes to your account. The amount the employer deducts is called TDS (Tax Deducted at Source).

Salary Breakup Calculation

Let’s assume an employee is having an annual CTC of 4,20,000. For this salary, the monthly breakup would be as follows:

  • Basic- 40% of CTC- Rs. 14,000/
  • HRA- 40% of Basic- Rs. 5,600/
  • Conveyance Allowance-Rs.1,600/
  • Mobile & Internet Allowance-Rs.1,000
  • Leave travel allowance- Rs. 3,000/
  • PF employer contribution- Rs. 1,680/(12% within the wage ceiling of Rs.15,000)
  • Special allowance/other taxable allowance- Rs. 8,120/
  • Gross Salary (Basic+ Allowances)- Rs. 35,000/

How to Save Your Tax

You must have heard the saying, “A penny saved is a penny earned.”

Tax planning is one of the methods that can help you save taxes and increase your income. The Income Tax Act offers deductions for different investments, expenditures, and savings the taxpayer pays in a specific financial year. Here are some of the ways that will help you save taxes. Let’s have a look.

Buy a home loan and enjoy tax benefits under Section 80C- Several government-mandated programs, like the Pradhan Mantri Awas Yojna (PMAY) and Delhi Development Authority (DDR) Housing Scheme, focus on making housing accessible in India, while Sections 24 (b) and 80C minimize financial liability through less tax burdens.

The annual income spent on repayment of the principal derived amount is entitled to Section 80C deductions to 1.5 lahks. Section 24 (b) permits tax exemption on the interest portion of a house loan to Rs 2 lakh every year.

Likewise, if you rent out the newly bought home, the whole interest component is exempted from the annual income tax computations.

People who buy a property with the motto of building a home can also profit from Section 24 (b) if the construction procedure is completed within five years.

Section 80EEA lets you claim an extra reduction in your annual tax liability if you are buying a home for the first time.

Purchase a Health Insurance Policy- Under Section 80D, premiums paid in any mode rather than the cash towards ensuring the health of the individual, spouse, or dependent kids are eligible for a deduction of 30,000 from your taxable salary.

Paying the premium on health policies of one’s senior citizen parents makes you the right candidate for an extra deduction of 50,000 from your taxable salary, therefore helping you save a considerable amount of tax. This limit comprises the expenses of up to 5,000 encountered on preventive health scans.

Invest your money in different government schemes- Several government-mandated strategies provide high returns on total investments and tax waivers. People can claim up to Rs. 1.5 lakh spent on such investments as tax waivers on the total annual income under Section 80 C of the Income Tax Act.

You can avail tax exemptions by investing in the following tools:

  • Senior Citizen Savings Scheme (SCSS)
  • Sukanya Samriddhi Yojana (SSY)
  • Public Provident Fund (PPF)
  • National Pension Scheme (NPS)

FAQs Related to Salary Breakup

Following are some common FAQs related to the salary breakup:

What does a salary slip or payslip mean? A salary slip or a payslip is a document an organization offers every month. It acts as a statement of payment received by the employee.

It comprises all the components of a salary breakup- a payslip issued in both hard and soft copies that serve as payment proof. The salary slips act as employee ID proof if the identity card is unavailable. Also, payslips help in getting credit cards and loans.

What is TDS?

TDS, also known as Tax deduction at Source, is the deduction of a specific amount as tax before processing the payment to the worker. The organization deducts the taxes at the Source on behalf of the employee responsible for paying taxes and submits those taxes to the government’s account.

Regarding a salaried employee, the organization deducts tax at the Source as per the Income Tax Act 1961. An employee can declare TDS for some amount by filing an ITR (income tax return) for that assessment year.

Why is Form 16 crucial?

Form 16 is proof that an employee has paid the taxes on time. It confirms that the employee’s income is valid, genuine, and recorded with the government. Form 16 includes the tax deduction details and helps file the correct Income Tax Returns.

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

The amount a worker receives in their account differs from the CTC. It can be explained as a company’s total expenditure on an employee. It includes basic pay, allowances, bonuses, EPF, and incentives.
On the contrary, the in-hand salary is the money an employee takes home after bonuses, allowances, and TDS are added.

When and how much gratuity will I get?

In India, the basic needs for gratuity are set under the Payment of Gratuity Act of 1971.
To fall under this Act and to qualify for gratuity, one must complete at least five years of experience in one organization.

How to calculate gratuity

Gratuity= {(Basic monthly salary + D.A.) X 15 days X total years of service} / 26
The basic monthly salary is the previous month’s basic pay when an employee leaves the organization.

How do I check my PF balance?

To check your PF balance, you need to follow the below-mentioned steps:

  • Download the PF passbook by clicking here.
  • Once you log into your account, click “View the Member Passbook.”
  • When you log in for the first time, it will show the message, “Invalid Login Credential.” Then re-try after two days. Once you log in after two days, it will show the message, “Passbook will be available after four days.” After four days, when you log in, download your passbook copy.
  • The username is your UAN number ( Check your salary slip to get your UAN number).
  • Password ( the one you had generated while activating UAN)

1 thought on “What Is Salary Breakup? Understand CTC, Salary Components, And Salary Structure”

  1. Thank you for sharing this important information with us. Reading the article is quite beneficial. I thoroughly enjoyed reading this post.

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