A salary slip has two sides: Earnings (Basic, HRA, DA, special allowance, LTA, bonus) and Deductions (employee EPF, professional tax, TDS, ESI). CTC ≠ Gross ≠ Net. CTC adds the employer's costs (employer EPF, gratuity, insurance); gross is what you earn before cuts; net (take-home) is what hits your bank. For FY 2025-26 the standard deduction is Rs 75,000 in the new (default) regime and Rs 50,000 in the old — but HRA, LTA and most other salary exemptions apply only in the old regime.
The new tax regime is the default from FY 2023-24. It gives a bigger Rs 75,000 standard deduction and lower slab rates but removes HRA, LTA and most Chapter VI-A deductions. The old regime keeps those exemptions with a Rs 50,000 standard deduction. You choose each year while filing.
Salary Earnings Components & Their Tax Treatment
Each earning line on your payslip is taxed differently. Exemptions marked "old regime only" are switched off if you stay in the default new regime.
| Component | Typical share | Tax treatment | Notes |
|---|---|---|---|
| Basic Salary | 40–50% of CTC | Fully taxable | Base for EPF, HRA, gratuity. Higher basic = more PF, lower take-home |
| House Rent Allowance (HRA) | 40–50% of basic | Partly exempt | Exempt u/s 10(13A) — old regime only. See HRA exemption |
| Dearness Allowance (DA) | Govt / PSU | Fully taxable | Inflation-linked; counted in EPF and gratuity base |
| Leave Travel Allowance (LTA) | 1–2 months basic | Partly exempt | u/s 10(5): domestic travel, 2 trips in a 4-year block — old regime only |
| Special Allowance | Residual | Fully taxable | Catch-all used to fill the package; no exemption |
| Performance Bonus | 0–30% of CTC | Fully taxable | Taxed as salary in the year received; TDS applies |
Standard deduction of Rs 75,000 (new) / Rs 50,000 (old) is allowed on salary and largely replaces old per-allowance exemptions like conveyance and medical.
Deductions on Your Payslip
These are subtracted from gross to arrive at your take-home. EPF and professional tax are statutory; TDS depends on your projected annual tax.
| Deduction | Rate | Who bears | Notes |
|---|---|---|---|
| EPF — employee | 12% of Basic+DA | Employee | To your EPFO account; qualifies for 80C (old regime). Interest 8.25% for FY 2025-26 |
| EPF — employer | 12% of Basic+DA | Employer | Part of CTC, not deducted from salary; 8.33% to EPS (pension) capped at Rs 15,000 wage |
| Professional Tax (PT) | State-specific | Employee | Max Rs 2,500/year; e.g. Maharashtra Rs 200/month. Deductible from taxable salary |
| TDS — income tax | Per slab / regime | Employee | Employer deducts monthly u/s 192 on projected income. Declare investments to lower it |
| ESI — employee | 0.75% of gross | Employee | Only if gross wage ≤ Rs 21,000/month; funds ESIC medical benefits |
Employer EPF (12%) and any ESI/gratuity provision sit inside CTC but are not cut from your salary — they raise CTC above your gross.
Because EPF is 12% of Basic+DA, a package with a high basic means more PF is deducted every month — lower cash in hand today, but a larger retirement corpus and more 80C benefit. A high special allowance does the reverse: more take-home, less forced saving.
CTC vs Gross vs Net Salary
The offer letter shows CTC; the payslip shows gross and net. They are never equal.
| Concept | Formula | What it is |
|---|---|---|
| Gross Salary | Basic + HRA + DA + allowances + bonus | Total earnings before any deduction |
| Net / Take-home | Gross − employee EPF − PT − TDS − ESI | Amount credited to your bank each month |
| CTC | Gross + employer EPF + gratuity + insurance + perks | Total annual cost to the employer; always highest |
Indicative monthly breakup at three CTC levels (TDS estimated on new-regime rates for FY 2025-26; actuals vary with structure and declarations).
| Line | Rs 6L CTC | Rs 12L CTC | Rs 24L CTC |
|---|---|---|---|
| Basic | Rs 21,000 | Rs 42,000 | Rs 80,000 |
| HRA | Rs 10,500 | Rs 21,000 | Rs 40,000 |
| Special allowance | Rs 11,350 | Rs 23,250 | Rs 53,950 |
| Gross / month | Rs 42,850 | Rs 86,250 | Rs 1,73,950 |
| Less: employee EPF | −Rs 2,520 | −Rs 5,040 | −Rs 9,600 |
| Less: professional tax | −Rs 200 | −Rs 200 | −Rs 200 |
| Less: TDS (new regime) | ~Rs 0 | ~Rs 3,800 | ~Rs 27,000 |
| Take-home / month | ~Rs 40,130 | ~Rs 77,210 | ~Rs 1,37,150 |
| Employer EPF (in CTC) | Rs 2,520 | Rs 5,040 | Rs 9,600 |
Illustrative only. EPF taken on actual basic; statutory minimum is Rs 15,000 wage. TDS depends on regime, declarations and rebate u/s 87A.
After employer EPF, gratuity, employee EPF, professional tax and TDS, in-hand pay typically lands at 65–75% of CTC. The gap widens as income rises and TDS grows. Run your exact number in our income-tax calculator.
Which Salary Components Are Tax-Free?
The big salary exemptions live in Section 10 and mostly need the old regime. The one benefit both regimes share is the standard deduction.
Old regime — exemptions live
- HRA exempt u/s 10(13A) — least of actual HRA, 50%/40% of basic+DA, rent − 10% of salary
- LTA exempt u/s 10(5) — 2 trips in a 4-year block
- 80C, 80D and other Chapter VI-A deductions
- Standard deduction Rs 50,000
New regime (default) — few survive
- HRA & LTA exemptions NOT available
- Most allowances fully taxable
- Standard deduction Rs 75,000 (higher)
- Employer NPS 80CCD(2) still allowed
- Rebate u/s 87A up to Rs 12L taxable income
Retirement & exit payouts
- Gratuity — exempt u/s 10(10) up to Rs 20,00,000 (non-government). See gratuity tax.
- Leave encashment on retirement — exempt u/s 10(10AA) up to Rs 25,00,000 (non-government, raised from Rs 3L in 2023). See leave encashment tax.
- EPF withdrawal — tax-free after 5 years of continuous service; taxable with 10% TDS u/s 192A if withdrawn earlier. See EPF withdrawal tax.
- EPF interest — taxable on employee contribution above Rs 2,50,000/year (Rs 5,00,000 if no employer contribution) u/s 10(11)/(12).
- ESOP — taxed as a perquisite at exercise on FMV minus exercise price; eligible startups get TDS deferral. See ESOP perquisite tax.
The old Rs 1,600/month transport allowance and Rs 15,000/year medical reimbursement exemptions were subsumed into the standard deduction from FY 2018-19. Today only the standard deduction (Rs 75,000 new / Rs 50,000 old) covers them — separate "medical allowance" on a payslip is fully taxable.
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