Understanding Payslip: Here's Important Things to Know About Payslip

To help the taxpayers reduce their tax liabilities , the Indian government has introduced a host of tax deductions and exemptions. But to take advantage of these deductions, you first need to understand your payslip thoroughly. Here are some of the most important things you should know about payslip and income tax-

Take a look at your payslip, and you will mostly find your salary broken down into these components-

• Basic Salary: The basic salary is used for determining other components of your salary. It is generally up to 50% of the CTC and is fully taxable.
• Allowances: Most employers also offer several allowances for covering your travel expenses, living expenses, medical expenses, house rent, etc.
• Employee Contribution: Salaried employees also receive retirement benefits by regularly contributing to the same. This contribution is generally towards NPS ( National Pension Scheme ) and PPF (Public Provident Fund).
• Bonus: Most employees also receive an annual bonus. This again is fully taxable, and the tax you need to pay on the same depends on your tax slab.
• TDS: Your employer deducts tax directly from your salary and deposits the same with the IT department. This is known as TDS, or Tax Deducted at Source.

As mentioned above, the CTC and take-home salary are two very different things. Your CTC is the total amount that your employer is spending on you in a year. So, the CTC is calculated by adding your basic salary, contributions, allowances, bonuses, and more.Your take-home salary, on the other hand, is your gross salary minus the exemptions and payable income tax after discounting the deductions.

Salaried employees also enjoy a host of retirement benefits. But these benefits could vary between employers. Some of the most common retirement benefits are as follows-

• Voluntary Retirement: Any kind of compensation that an employee receives towards voluntary retirement is exempt from income tax under Section 10(10C).
• Gratuity: Employees are entitled to receive gratuity from their employers when they finish five years of service. But the gratuity amount is only paid when you resign or retire. Tax treatment for this gratuity amount depends on whether you are a state/central government employee or if your employer is covered under the Payment of Gratuity Act.
• Pension: The employer also contributes a certain amount towards your pension every month. But the pension amount is taxable.

To select the best tax-saving options for salaried , you should also have a basic understanding of the income tax slabs. The slabs vary on the basis of your annual income and age. Moreover, this year, you have the option to choose between two tax slabs. Here is a quick overview of the income tax slabs for FY 2020-21 for a salaried employee under the age of 60 years-

While the tax rate is lower as per the new regime for most tax slabs, you will not be able to claim deductions if you choose this regime.

It is crucial to understand your payslip and the tax slab you fall under so that you can take effective steps to reduce your tax liabilities. Your payslip itself has several components, like HRA, LTA, etc. that are eligible for deductions and exemptions.You can also take advantage of other deductions options such as under Section 80C , Section 80D , Section 24 , Section 80E, and more to reduce your tax liabilities further.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.