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Whenever an employee joins an organization, a total package is proposed as CTC (Cost To Company) that the employer spends on the individual. This final amount consists of a number of elements that explain the breakup of salary and the required deductions. These payroll deductions are withheld by the employer from an employee’s paycheck. It can be both voluntary and involuntary. There are basic deductions including reasons such as absenteeism from work, loss or damage of company property, recovery of overpaid salary or invalid benefits. The involuntary or compulsory deductions revolve around government taxes, schemes, policies and insurances. All others are voluntary or optional and employees can choose to keep or get them deducted.
There are mainly 3 kinds of deductions from an employee’s salary:
Deductions by the law:
This includes Wage Garnishments like Income Taxes, Social Security Taxes and others
Deductions for employers’ ease
This includes Salary Advances and Docking for Spillage, Breakage or Cash Register Storages
Deductions for employees’ benefits
This includes Charity, Benefit Premiums among others
Now, let us have a look at the two most common and basic salary deductions.
Employee Provident Fund:
It is a retirement benefit scheme wherein if the basic salary of an employee is less than INR 15000, both the employer and employee contribute 12% of the basic pay to raise this fund. It is deposited in the employee’s PF account and can be debited when the person leaves the organization. An employee can also avail the online PF withdrawal facility with EPFO official site. Else, it gets transferred to the next organization.
Employees’ State /Insurance:
ESI contribution is a self-financing plan, enforced as a social security scheme wherein the indemnity covers 4% of the employee’s gross salary. The employer adds 3.25% and the remaining 0.75% is deducted from the employee’s payroll. Employees earning wages of INR 21,000 a month or less are liable to avail this insurance for covering medical charges and other financial aids.
If you want to know how to calculate ESI, then follow the steps mentioned below:
- Enter the employee’s Gross Salary and take 3.35% of it from the employer’s side (Call it A)
- Enter employee’s salary again and take 0.75% of it from the employee’s side (Call it B)
- Now add A and B
- The final sum of A and B is the amount deducted from the remuneration of the employees every month and is called as ESI deduction
Besides the aforementioned deductions, there are health insurances and mediclaims, HRA (House Rent Allowance), LTA (Leave and Travel Allowance), Professional Taxes and other standard deductions. There is also a number of legal liabilities that have to be done and deducted from the employee’s salary.
No matter how much the employees cringe at the time of these payroll deductions, it never goes in vain. The government bodies controlling these kinds of policies and rules engage in comprehensive planning to devise and implement such employment plans. Hence, it will always prove to be beneficial for the employee, the employer and the other parties involved, if not immediately, then definitely in the long run.
