Understanding Salary Breakup and Structure is important for employees as it provides a base for future planning. Read on to know more!
Finance is a difficult topic to study and understand. Terms like CTC, gratuity, gross payment, net salary, allowances, Income Tax, etc can create a lot of confusion in an employee’s mind.
However, it is really important to understand these terms to have better financial knowledge about your salary structure. So that you can do better financial planning for your future, especially after retirement.
CTC
Cost to company or CTC for employees is the cost of an employee’s salary, benefits, and other expenses. The cost to company for employees is also known as the Total Compensation Expense. CTC is more than the salary of an employee that they receive in hand. It includes allowances as well as bonus amounts.
The total salary of an employee includes many additions and deductions. Understanding Salary Breakup and Structure is very important as it helps in financial planning.
Basic Salary
The basic salary includes the minimum amount that an employee gets. It is a part of the annual CTC that the employee receives on the monthly basis. It depends on the company the employee works for and his designation. The base pay also depends upon the industry and the country they are working in.
Basic salaries the amount that the employee receives after deductions are made from the annual gross payment.
Gross Pay
In addition to the basic salary of the employee along with the allowances they receive we get the gross payment. Gross payment is different from the annual CTC as the CTC is the amount calculated after the deductions are made, whereas the gross payment is the amount before the deductions are made. It includes all types of bonuses and overtime amounts that the employee receives.
Allowances
Understanding Salary Breakup and Structure includes the understanding of allowances given to an employee. Allowances are given to an employee based on their eligibility and the service requirements they meet. There are different types of allowance given to an employee ranging from housing rent to travel expenses.
We’ve mentioned below some of the important allowances given to an employee.
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HRA
Housing Rent Allowance is a benefit for employees who are required to live away from their place of work. The amount of rent allowance depends on the number of dependents and the cost of living in each area.
It is a component of the employee’s salary that can be used towards rent. It is an allowance paid to employees who are in rented accommodation or have purchased their own homes, and it reduces the amount of income tax payable on housing costs.
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LTA
If an employee has to travel domestically for the purpose of work. The company covers the travel expenditure full stop however this amount does not include the cost related to food and accommodation during the travel.
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Conveyance Allowance
The travel expenses that an employee has to bear for traveling from the place of residence to the place of work are paid by the company in the form of a conveyance allowance.
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Dearness Allowance
DA applies to all sectors of employees including the Government, the public, and pensioners.
These are the additions made to the basic salary of an employee full stop the basic salary along with these allowances from the gross annual pay.
Employee Provident Fund and Public Provident Fund
Employee Provident Fund is a scheme that provides retirement benefits to employees. A certain amount of employees’ salary is deducted and invested in the Employee Provident Fund. This fund is useful for the employee when they retire.
Public Provident Fund (PPF) is a government-run fund that helps you save money for your retirement. It allows you to invest the amount of interest earned by your savings in a PPF account and earn interest on it. You can withdraw the principal amount from the account after maturity at any time, without penalty or tax.
A certain amount of salary is deducted when employees are eligible for EPF and PPF. This money is added to the funds and they receive the benefits on the maturity of the fund.
Income Tax
Every individual who earns a salary higher than a particular limit has to pay income tax. This tax is deducted from the employee’s salary before they receive it. This is called TDS or tax deduction at source. This work is done by the employer or the company and the deducted tax is directly paid to the government
Form 16
The employee is provided with Form 16 by the employer or the company. This form is supposed to be filled out and submitted as proof of their income and tax liability. Form 16 has to be submitted by the employee each financial year.
Gratuity
Gratuity is a special type of payment that an employer may make to an employee for services rendered. This amount is included in the CTC of the employee and is deducted from their salary.
The amount of gratuity depends on what kind of service was provided and how long the individual worked for the company. If you are unsure about your employment status or if you have questions about gratuity, you can contact Vakilsearch. They have a team of experts who will solve all your queries. Vakilsearch also offers a Gratuity calculator. Using this tool, you can calculate the gratuity you will receive based on the number of years you’ve worked at a company.
Conclusion
If you are an employee working for a company or employer it is important for you to know the salary structure. Understanding Salary Breakup and Structure will help you understand where your money is invested and you’ll be able to plan your finances better.
If you need help understanding any of the financial or legal terms you can contact Vakilsearch. Our team of legal consultants will contact you and solve all your queries. This will help you understand different aspects of your salary structure. If you want to calculate your allowances, Gratuity, and deductions, you can use the salary calculator provided by Vakilsearch. You have to provide basic information and the tool will calculate allowances and deductions for you easily.
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