Understanding Indian Salary Slip - Importance of Basic salary

Many of us have surprised seeing first salary being so different than mentioned in CTC (Cost to the Company). Many of us have felt shocked and may be cheated. Even I too felt the same when I saw my first in-hand salary. But after understanding every section of CTC in detail, I learnt that in-hand salary was as expected. Being in industry for almost decade in India, I still find many young colleagues feel bemused while understanding salary slip and comparing against CTC. So I decided to share my experience with you all in simplified way so that you all know what exactly you are getting in-hand salary. All basic components of CTC along with some financial myth behind it and Tax saving tips are described in separate post.

Basic Salary

It is the most important component of your CTC. This decides the Provident Fund (Savings for Future) component of your salary. Usually employer contributes 12% of the basic salary in to PF and also similar contribution done by employer. That is also one of the reason that you see your in-hand salary is less that what you see in CTC. And to be very frank this is really very good investment for future. PF Money stays with the government statutory body and currently rate of interest for PF is 9.5%. This is really very good return on your investment looking at volatile financial market.

What I mean by above paragraph? Have a look at below example calculation.

Example CTC Figure:

Basic Salary:   15000

Employer’s contribution towards PF (12% of Basic Salary): 1800

Employee’s contribution is never mentioned in CTC. So you will say below figures in your salary slip.

Basic Salary: 15000

PF Contribution (12% of Basic Salary): 1800

So it means what you get in-hand basic salary is 13200. So your in-hand salary is reduced by an amount of 1800. But this amount is saved for your future. This is compulsory saving directed by government.

Many companies keep the basic salary as low as possible, while this is compulsory amount, contributed for PF, from both employee and employer. By keeping Basic salary component small, many companies keep to contribution to PF small at the same time keep the in-hand salary high for employee.

The amount saved under PF by employee is also claimed under section 80C to save the Income Tax.