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What is the difference between CTC and Net Salary? | CA Rachana Ranade - YouTube
Channel: CA Rachana Phadke Ranade
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Hey folks!!! CA Rachana Ranade here and I聽
welcome you all to another interesting lecture聽聽
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wherein we are going to talk about three聽
terms which are very very very important聽聽
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for any person who is in employment. Which聽
are the three terms? First one is CTC, Second聽聽
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one is gross earning or the gross salary and the聽
Third one is net salary sometimes referred to as聽聽
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your in-hand salary but what is the meaning of聽
these three terms are there any components in that聽聽
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what is the tax angle to that all this coming聽
up in the immediate next parts of the video.聽
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So let's understand what is CTC. CTC is nothing聽
but cost to company it's the amount that the聽聽
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employer is willing to pay towards the employee聽
but it's not necessarily the amount that the聽聽
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employee is going to receive in hand what's the聽
example for this let's say I offer you a salary聽聽
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okay and assume that I offer a CTC of 18 lakh聽
rupees does it necessarily mean that you are聽聽
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going to get 18 lakhs divided by 12 that is聽
1.5 lakh in hand per month? answer is No,聽聽
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because your CTC can have multiple components okay聽
which components what we are going to discuss that聽聽
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in the subsequent parts of the video but I will聽
give you a very short example right now itself聽聽
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assume that I split your 18 lakh CTC as 12 lakh聽
fixed and six lakhs variable okay now this six聽聽
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lakh variable I may term it as a performance聽
bonus now assume that you are not able to meet聽聽
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your targets and out of six lakh the actual payout聽
comes to only let's say 4 lakhs because assume聽聽
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that you are out of 100% you are able to achieve聽
only 75% of your target or something like that聽聽
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okay so in that case what will happen out of your聽
6 lakh performance bonus which was a part of your聽聽
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CTC the actual payout might be lesser than that聽
it might be let us say only four lakh in that case聽聽
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for that specific year can I say your CTC dropped聽
down from 18 lakhs to what to 16 lakh only okay聽聽
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because you lost out on the 2 lakh of performance聽
bonus so that is how I can tell you that CTC is聽聽
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always a bigger number as compared to what you're聽
going to get in hand in certain scenarios it might聽聽
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be more or less equal but it just can't happen聽
that your in-hand salary will ever exceed the CTC.聽
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Well before we move on please understand聽
that there is one thing which is far more聽聽
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important than CTC gross salary or net salary聽
that is your in-hand salary and what is that聽聽
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it's the like button even if聽
you smash it any number of times聽聽
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no tax will be directed so don't forget to聽
like it and then move ahead with the video.聽
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Let's take an example and understand what could聽
be the possible splits what could be the different聽聽
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components of CTC before we proceed with the聽
example please understand that this is just an聽聽
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illustration this is just an example whatever聽
allowances am going to discuss in this example聽聽
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right now it's not necessary that your employer聽
will give each and every of the allowance that聽聽
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I am discussing in this example there could be聽
some plus minus to this as well okay so let's聽聽
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understand this is the example wherein a specific聽
employer says that what is going to form a part of聽聽
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your CTC. It can be basic salary HRA that is your聽
house and allowance, children education allowance,聽聽
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leave travel allowance, very commonly known as聽
LTA medical allowance, special allowance gratuity聽聽
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employers contribution to PF all these put聽
together that total 4,38,000..... This entire聽聽
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thing will form a part of your CTC okay as as聽
mentioned could there be a company which doesn't聽聽
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offer any special allowance? Yes. Could there be聽
a company which has some other allowance rather聽聽
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other than all these whatever I have discussed聽
right now yes absolutely possible so you have a聽聽
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homework today go and check your offer letter and聽
see which all allowances are you getting are these聽聽
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same or some different allowance you're getting聽
right. Now understand there is one specific point聽聽
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here I have taken a a subtotal which is your gross聽
salary okay now what is this gross salary 4,08,200聽聽
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this gross salary is going to be very聽
close to what you're going to get in hand聽聽
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okay so what is the difference understand your聽
CTC is 4,38,000 something but your gross salary is聽聽
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four like eight thousand something okay which is聽
going to be very close to your enhanced salary not聽
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4,38,000 it's gonna be four lakh eight thousand聽
two hundred that is going to be close to your聽聽
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in-hand salary now which are the two components聽
which are missing from this gross salary聽聽
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figure in our example these are graduating聽
and employers contribution to PF. Now please聽聽
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understand in our example gratuity of almost 8,600聽
plus was forming a part of your CTC. Assume that聽聽
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you joined the company and you leave the job in聽
two years are you even going to get this? No,聽聽
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gratuity will be paid out to you if and only if聽
you stay with the company for a period of five聽聽
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years okay so if you don't stay with that聽
company for five years this 8,600 whatever聽聽
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is going to be gone forever but still will聽
that be a part of your CTC? Yes. Okay I hope聽聽
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you are understanding the difference second one is聽
employers contribution to PF I am sure you might聽聽
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be aware about this basic thing that uh a certain聽
percentage is fixed say 12% okay so employer聽聽
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contributes 12% employee generally matches聽
it okay so employee will also contribute 12%聽聽
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employers contribution will not be paid out to聽
you every month that will go to a pool okay and聽聽
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whenever you leave the organization or let us say聽
on retirement whatever is the case at that time聽聽
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it will be paid out to you okay but that even聽
if firms part of your CTC will not form a part聽聽
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of your gross salary. I hope you have understood聽
we are trying to shift from what to what from CTC聽聽
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to gross salary I hope the聽
difference is absolutely clear.聽
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Now let's try and decode the pay聽
slip but before we move on to that聽聽
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let's again get back to the same chart聽
that I was showing you just a minute ago聽聽
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in that if you've observed we had two columns聽
one was a pa, per annum amount and one is pm聽聽
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which is the per month amount okay now you聽
can see that the gross salary per month was聽聽
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around thirty four thousand and sixteen rupees聽
and the CTC was 36,538 rupees now the million聽聽
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dollar question to you is that out of these two聽
figures which figure will appear on your pay slip?聽
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what is your answer a or b thirty four thousand聽
and sixteen or thirty six five thirty eight and聽聽
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the correct answer is thirty four thousand and聽
sixteen so if you want to check this in your pay聽聽
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slip just have a look at this pay slip now okay聽
what do you see there is one sub total which says聽聽
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your total gross earnings that is nothing but your聽
gross salary 34,016. Now what is the split of this聽聽
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let's understand the split first one is basic聽
salary okay so out of your 34,000 rupees your聽聽
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basic salary is only 15,000 rupees don't feel that聽
array area this is even less than half of your聽聽
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gross salary doesn't make a difference as such in聽
fact your basic salary is 100 taxable okay you don聽聽
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not get even one rupee reduction out of that so聽
even if it is less you should be happy with that聽聽
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okay so that's a basic salary. Now if you look聽
at the other points in your pay slip what are聽聽
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these other points house rent allowance, children聽
education allowance, LTE medical alarm special聽聽
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allowance, uh I am taking some creative liberty聽
here if I look at these allowances it's as good as聽聽
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an employer is taking full care of the employee聽
okay how employer is giving you basic salary聽聽
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employer is ensuring that employer pays for the聽
house rent of yours by giving you a house rent聽聽
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allowance so taking care of your accommodation,聽
taking care of your children's education allowance聽聽
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so taking care of your kids education to some聽
extent taking care of your leisure travels聽聽
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by giving you an LTA, taking care of your聽
medical allowances so taking care of your health聽聽
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if you look on the right hand side deductions聽
taking care of your retirement in the nature of pf聽聽
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so see how good employers are okay but uh anyways聽
all in all finally it's nothing but just a breakup聽聽
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of your total gross earnings which I am聽
showing you in the nature of pay slip聽聽
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are there any tax angles involved here? Answer聽
is absolutely YES, I am not going to go into聽聽
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detail in tax angles why this is not a taxation聽
lecture this is just understanding the pay slip聽聽
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so just to give you a brief idea on this as I聽
mentioned basic is fully taxable basic salary聽聽
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fully taxable house rent allowance may or may not聽
be fully exempt depends on certain conditions okay聽聽
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so if you want to understand on uh what there are聽
basically three conditions which we have to check聽聽
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and least of the following it's a big calculation聽
which is involved if you want to check this聽聽
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understand HRA with the help of a proper example聽
check out our blog which we have written on HRA聽聽
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you can also click the I button and go聽
directly to the blog and read about HRA,聽聽
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okay so in simple words it may or may not be聽
fully exempt depending on certain conditions right聽聽
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third one is children education allowance聽
now uh if this is a very big big humor聽聽
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or big joke why I will tell you my child's fee聽
annual fee is around 50,000 rupees per year okay聽聽
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and when I was discussing this few of my friends聽
they said Rachana it is very cheap because we are聽聽
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paying one lakh plus per year so I said oh my god聽
that's that's so much and you know how much is the聽聽
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exemption or the deduction which is聽
available it is 100 rupees per month聽聽
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okay subject to maximum of two children聽
okay so how much exemption am I going to get聽聽
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100 multiplied by 12 okay multiplied by 2 is not聽
standard if I have only one child algorithm only聽聽
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so out of the 50,000 rupees that I have paid pura聽
1200 rupees. I am going to get as a deduction聽聽
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okay it's a joke but yes that is how much maximum聽
is going to be allowed as a tax exemption for you聽聽
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okay uh well I am using the word deduction聽
and exemption interchangeably right now it's聽聽
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not correct we are not go this is not a taxation聽
lecture right so emotions cause summer's low right聽聽
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moving on what is the next? Next one forming a聽
part of your pay slip that is your LTA. LTA is聽聽
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what leave and travel allowance okay so basically聽
as I mentioned uh the employer says don't be聽聽
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only work have fun and come fully charged up and聽
then work double right that is the expectation聽聽
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of the employer. Now there are certain rules聽
and regulations involved again how much can be聽聽
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exempt from the LTA that you receive just to give聽
you few examples if you do a travel outside India聽聽
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that will not be allowed as a deduction if you are聽
going ahead with claiming a benefit for LTA okay.聽聽
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Who can accompany you? That is also very important聽
otherwise if you are saying a poorer deduction I聽聽
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want uh it will be like everyone is going a b c d聽
e f g h everyone will not get that entire amount聽聽
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will not get you get as a deduction, okay again聽
who is covered what is the definition of relative聽聽
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everything is given in the section if you if you聽
really want to read the sections I will give you聽聽
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links in the description box all yours you can聽
read the entire bare sections also and get to know聽聽
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more about it but I am just going to give you a聽
brief flavor about it okay so that was about LTE.聽聽
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Medical allowance moving on to that uh that聽
is also pretty close to basic salary as far聽聽
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as the taxation is concerned because whatever聽
medical allowance you're going to get that's聽聽
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going to be fully taxable okay special allowance聽
differs from company to company it can be a car聽聽
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allowance it can be a driver allowance it聽
can be a cook whatever it can be any sort聽聽
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of allowance internet allowance very creative it聽
can be so I hope you have understood that if I聽聽
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add up all these together this amount 34,016聽
is going to be your total gross earnings is聽聽
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this what you're going to get in hand no from聽
this amount there will be certain deductions聽聽
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which reductions what is the meaning of that is聽
going to come up in the next part of the video.聽
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So let's understand what could be the聽
different deductions again have a look at our聽聽
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pay slip could these be only three deductions for聽
each and every employee? No, in some companies聽聽
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deductions could be more than this or could also聽
be less than this these are the deductions in our聽聽
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example right so let's understand these deductions聽
one by one the very first one is profession tax聽聽
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uh generally 2500 rupees is the amount聽
of proficient tax which has to be paid聽聽
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but what does the employer do employer cuts聽
200 rupees per month from your salary and聽聽
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pays it but in the month of February 300 rupees聽
will be deducted from your salary so 200 into聽聽
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11,2200 and 300 in the month of February will聽
take it to the total of 2500 rupees per year聽聽
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right second one is provident fund now what聽
is this proven fund this is the employee's聽聽
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contribution to provident fund if you remember we聽
talked about employers contribution to provident聽聽
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fund okay so this will be generally same so聽
say 12 percent was contributed by the employer聽聽
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same 12 percent will be contributed even by the聽
employee and this employee's contribution will聽聽
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reflect in the deductions come out right third one聽
is TDS. This TDS is nothing but your income tax聽聽
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so employer will cut tax at source and will pay聽
to the government okay now as a homework what聽聽
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you can do is take out all your pay slips take聽
the total of TDS and see whether this total TDS聽聽
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matches as per your firm 16 ideally the total聽
should be same in form 16. there's one more form聽聽
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where you can cross check the amount of TDS and聽
I want you all to tell me in the comment section聽聽
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which form is that I hope with this聽
you have understood all the deductions聽聽
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which were visible in your pay slip so in simple聽
words to round it up again what was the scenario聽聽
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first we talked about the CTC from that we聽
derived the gross earning and from gross聽聽
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earning we had certain deductions and we came聽
down to the net salary or your in-hand salary.聽
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Well I hope you have enjoyed this video and a聽
small request from my side is that please share聽聽
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this video especially to those friends聽
who are from a non-commerce background聽聽
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because for them you know watching a pay slip聽
can be really overwhelming they can get confused聽聽
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with this video they'll be able to understand聽
each and every component of their pay slip聽聽
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if you've enjoyed this video share this with your聽
friends till then take care, Jai Hind and bye bye.
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you
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