• Basic Salary: This is a fixed component of your income that makes up around 35% to 40% of your total salary. It is used to calculate various variable allowances like the dearness allowance and the house rent allowance. 

• Dearness Allowance (DA): The dearness allowance is a monetary benefit paid to employees working in the public sector. It is offered to help employees manage the rising costs of living on account of inflation over the years. 

• House Rent Allowance (HRA): The house rent allowance is a benefit paid to employees to help them pay for rental accommodation. Depending on the amount of HRA paid, the allowance may offer partial or complete tax exemption to the tune of the least of the following: 

• Actual HRA received

• Actual rent paid minus 10% of the salary 

• 50% of the basic salary (for employees living in metro cities) or 40% of the basic salary (for employees living in non-metro cities)

• Leave Travel Allowance (LTA): This is an allowance paid by employers to compensate employees for travel expenses incurred during a period of leave. It also offers tax exemption benefits on the actual travel costs incurred. The LTA exemption is available for two journeys taken in a block of four calendar years. 

• Special Allowance: This allowance is paid to employees to cover certain specific costs and expenses. The amount paid and the costs eligible may vary from one employer to another. 

• Performance Bonus: A performance bonus is paid to employees who have achieved certain predetermined goals or demonstrated excellence in other ways. This helps encourage the recipient as well as other employees to perform better at work. 

• Other Allowances: Aside from the allowances outlined above, employers may also offer other monetary benefits that may be categorised as ‘other allowances.’

2. Deductions

This component contains any amounts that may be deducted from the total income earned. Some common deductions are listed below. 

• Professional Tax: In some states in India, professional tax is deducted from the employee’s salary. The amount of tax depends on the employee’s tax slab. 

• Employees’ Provident Fund: This deduction is made as a contribution towards the employee’s EPF account. Employees contribute 12% of their basic salary to their EPF account, and the employer matches this amount. The employee’s contribution to EPF is tax deductible u/s 80C of the Income Tax Act, 1961. 

• Tax Deducted at Source (TDS): TDS is deducted from the salary based on the employee’s income tax slab, and the net salary after deducting tax at source is paid to the employee.