Most people open their salary slip once a month, glance at the “net salary,” and close the file.
Big mistake.
That single PDF quietly decides:
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How much tax you pay
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How much goes into your Provident Fund
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How much cash you actually control
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Whether you’re optimising deductions—or leaking money every month
If you don’t understand the structure of your salary, you’re not doing tax planning. You’re guessing.
This guide breaks your salary slip down line by line, explains how tax works in FY 2025–26, and shows how to legally optimise tax, PF, and deductions—without gimmicks or last-minute panic.
The Structure of Your Salary: Why It Matters More Than You Think
Your salary isn’t just “CTC divided by 12.”
It’s a carefully structured mix of earnings and deductions. Two people with the same CTC can take home very different amounts—and pay very different taxes—depending on this structure.
Every salary slip has two main sections:
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Earnings (Credit Side)
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Deductions (Debit Side)
Understanding both is the foundation of smart tax planning—a point repeatedly emphasised in employee tax guides published by the Income Tax Department.
Earnings (Credit Side): Where Your Taxable Income Starts
This section shows what your employer pays you before deductions.
1. Basic Salary
This is the core of your pay.
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Usually 30–50% of CTC
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Fully taxable
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Forms the base for PF calculation
A higher basic salary increases PF contributions but also increases taxable income—something many employees realise only after reading official salary-structure clarifications from the Ministry of Finance.
2. Allowances
Allowances are added on top of basic pay. Some are taxable, some partially exempt, and some fully taxable depending on rules.
Common allowances include:
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House Rent Allowance (HRA)
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Special allowance
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Transport allowance
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Meal or fuel reimbursements (if structured)
How these are structured directly impacts your income tax, especially under the old tax regime.
3. Bonuses and Incentives
Bonuses are:
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Fully taxable
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Often paid annually or quarterly
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A common reason people jump tax slabs unexpectedly
If you receive a large bonus, your TDS must be recalculated—otherwise, you may face a significant tax shortfall later. This is a frequent issue flagged in employer payroll advisories issued in line with guidance from the Central Board of Direct Taxes.
Deductions (Debit Side): Where Your Salary Gets Cut
This section decides how much actually hits your bank account.
1. Provident Fund (PF)
PF is mandatory for most salaried employees.
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12% of basic salary goes to PF
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Employer contributes an equal amount
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Employee contribution qualifies as a tax deduction
PF is not a loss—it’s forced long-term savings with tax benefits. However, excess PF without liquidity planning can affect cash flow, a concern often highlighted by retirement planners referencing Employees’ Provident Fund Organisation guidelines.
2. Professional Tax
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State-level tax
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Small amount (₹200–₹2,500 per year depending on state)
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Fully deductible
Not worth optimising—but important to recognise when reconciling deductions.
3. TDS (Tax Deducted at Source)
This is where most confusion lies.
TDS is not an extra tax.
It’s an advance payment of your income tax, calculated based on:
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Declared investments
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Chosen tax regime
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Estimated annual income
Wrong declarations = wrong TDS = refunds or penalties later—a recurring issue discussed in taxpayer awareness material published by the Income Tax Department.
Old vs New Tax Regime (FY 2025–26): Choose Carefully
One of the most important decisions you make every year is choosing the right tax regime.
Old Tax Regime
Works best if you:
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Claim multiple deductions
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Invest regularly
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Pay rent or EMIs
Allows you to:
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Maximise tax-saving deductions
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Use exemptions like HRA, 80C, 80D, etc.
New Tax Regime
Works best if you:
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Want simplicity
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Have fewer deductions
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Prefer higher take-home now
Lower tax rates, but most exemptions and deductions are gone—exactly as outlined in regime-comparison notes released by the Ministry of Finance.
How to Decide (Simple Rule)
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If your total deductions exceed ₹3–3.5 lakh → Old regime usually wins
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If not → New regime may be better
Always calculate both before choosing. Never assume.
How to Maximise Tax-Saving Deductions (Legally)
Tax saving is not about buying random products in March.
It’s about planning in April.
Key deduction areas to use smartly:
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Section 80C (PF, ELSS, life insurance, etc.)
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Section 80D (health insurance)
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HRA (if you pay rent)
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Standard deduction (automatic)
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Education loan interest (if applicable)
These reduce taxable income—not just tax payable—an important distinction explained in official taxpayer guides by the Income Tax Department.
Action Steps: What to Do Right Now
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Download your latest salary slip
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Break it into earnings and deductions
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Identify your basic salary percentage
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Check how PF is calculated
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Recalculate tax under both regimes
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Submit accurate investment declarations
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Review TDS every quarter—not just in March
This one-hour exercise can save thousands every year.
Common Salary Slip Mistakes People Make
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Ignoring salary structure changes after appraisal
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Not updating rent or investment proofs
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Choosing tax regime blindly
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Treating PF as “lost money”
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Assuming HR will optimise tax for you
HR processes payroll. You manage your money.
Pro Tips Most Employees Miss
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A higher CTC doesn’t always mean higher take-home
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Bonus months need special tax planning
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PF is great—but liquidity planning matters too
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Tax planning works best when aligned with goals, not fear
Reading your salary slip properly is a financial skill, not an accounting task.
Final Thought: Your Salary Slip Is a Strategy Document
Your salary slip is not paperwork.
It’s a monthly financial strategy document that decides:
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Cash flow
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Tax efficiency
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Long-term savings
Once you understand it, tax planning stops feeling stressful—and starts feeling controlled.
If you haven’t reviewed your salary structure for FY 2025–26 yet, do it now.
March is too late.
