A payslip is a document that an employee receives from their organization with their monthly salary. All important elements and details about the monthly salary are covered here, like:
- Gross salary
- Various deductions
- Net take-home pay
Why is it important?
- If an employee is changing their job, the payslip is evidence of their last drawn salary.
- This allows them to ask for higher pay from their future employers.
A salary slip may be a conventional, physical paper-based document or a digital one duly mailed to an employee. Employers must periodically provide a salary slip to their employees as proof of the salary paid to them, and the deduction carried out thereof.
What comes under the basic structure of a payslip?
Every business follows its prescribed salary slip format, but its essential components will mostly remain the same. Here are the common components:
- Organization’s details:
- Employee’s details:
- Code number
- Aadhaar number
- Bank account number
- Employee Provident Fund (EPF) account number
- Universal Account Number (UAN)
- Total number of days worked
- Total number of leaves availed
- A description of the earnings and deductions as applicable to the employee
- The net salary amount is described in numerals and words
The core components of a salary slip
A salary slip displays various essential components of an employee’s salary like:
- Basic salary
- Allowances, such as:
- House Rent Allowance (HRA)
- Dearness Allowance (DA)
- Conveyance allowance (CA)
- Leave travel allowance, etc.
- Major deductions, such as:
- Provident fund
- Income tax
- Professional tax
Here’s a detailed note on these components.
- The basic salary comprises the total monthly take-home amount that usually constitutes 30 to 50% of the employee’s total compensation. However, the percentage of basic to total salary does not follow any prescribed format and, therefore, varies from organization to organization.
- House Rent Allowance (HRA): It is the second-largest component of an employee’s salary after the basic salary. It is calculated as a proportion of the basic pay and, in most cases, will be between 40–50% of the basic salary. Including the HRA component in the salary, slip helps structure tax efficiently.
- Medical expense reimbursement: As mentioned on an employee’s salary slip, a medical allowance is a fixed amount paid by the employer and is fully taxable.
- Transport/Conveyance allowance: It is mentioned on an employee’s salary slip if the employer provides allowances to the employee traveling for official purposes.
- Special allowance: After the above components have been covered, the remaining salary is known as a special allowance and is fully taxable for the employee. It is good to place any tax-saving options – like free meal passes – under this category.
- Variable component: This component of the salary slipcovers performance-linked incentives and bonuses. It is usually 10 to 15% of the total cost to the company and is fully taxable.
- Provident Fund: This is the employer’s and employee’s equal contribution, with 12% of the amount being deducted monthly by the employer from the employee’s salary.
- Income Tax: This is the total tax payable by the employee after accounting for all deductions and exemptions and taking into account the taxation slab they fall under.
- Professional tax: This is the amount charged by the state government to allow individuals to practice certain professions.
Let us understand the essential salary components with the help of an example. Suppose Mrs Thompson’s CTC is Rs. 7,00,000. This is the breakdown of her cost to the company (CTC):
- Basic Salary (i.e., 50% of salary): Rs. 3,50,000
- DA (i.e., 30% of basic): Rs. 2,10,000
- HRA (i.e., 40% of basic + DA): Rs. 2,24,000
- CA (Rs. 1,600 per month): Rs. 19,200
- Special Allowance (based on performance): Rs. 8,700
- EPF Contribution: Rs. 21,600
The Gross Salary refers to the amount before taxes, and other charges are deducted. But, it comprises any bonus, overtime, etc. Therefore, Mrs Thompson’s gross salary is Rs. 7,00,000 – 21,600, i.e.Rs. 6,78,400. This amount is used to calculate the net pay.
Why are payslips important?
The importance of a payslip to an employee cannot be understated. It helps in:
- Preparing income tax returns
- Accessing subsidized facilities – medical care, food grains, etc.
- Borrowing money by acting as proof of credit
- Negotiating for higher pay with new employers
- Acting as proof of employment for enrolling in a university abroad, applying for a travel visa, etc.
Advantages of shifting from manual to digital salary slips
There are many reasons to change from manual to digital salary slips with the help of cutting-edge payroll software:
- It helps a business’s administration department use its time efficiently.
- It helps reduce costs because of not having to print salary slips on paper and mail them to the employees. Apart from that, not using paper is good for the environment.
- Besides, with remote work becoming commonplace, sending digital salary slips to remote workers’ devices is extremely convenient.
We are in the middle of the most profound digital revolution transforming how everyone lives and works. Digital payslips are an essential part of the way forward. It, therefore, makes sense to leverage new-age tools from highly regarded payroll software, like Akrivia HCM. Doing so will save costs and time for the HR department and make the salary disbursal process more efficient.