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For certain people, a career or job is nothing more than a means to pass the time. For others, it provides a pathway to secure a respectable livelihood. However, there exists a minority for whom their job is their life’s primary focus.
When you work for a company they pay you a sum of money for your services, known as your salary. However, what you receive in your hands might be less than the gross salary, this is because there are various components and deductions involved.
In this article, we will clear all your confusion related to your salary, gross salary, CTC, in-hand salary, and the steps involved in its calculations.
Gross and Net Salary: What You Earn vs. What You Take Home
Understanding the difference between your gross salary and what you actually take home is really important, especially for freshers. This is because companies often mention something called “Cost to Company” (CTC), and it’s not the same as the money you receive in your pocket.
So, when you receive your first salary, and it is less than what you expected, don’t be surprised.
Gross salary is the total amount you earn before any deductions like taxes or other expenses. It includes all forms of income, not just the cash you receive. This also covers the extra benefits or services you receive from your employer.
Whereas, the net salary is what you take home after all the deductions. When a company talks about your CTC (cost to company), it means the total cost they will spend on you for a year, but remember your CTC is always more than what you get in your pocket. It represents your earnings before deductions like Income Tax, Provident Fund, And Medical Insurance.
So, in short, gross salary is what you earn before deductions, while net salary is what you take home after all the deductions are made.
Main Components of a Gross Salary
We will break down the key components of your gross salary, helping you understand what makes up your total earnings before deductions.
The gross salary comprises various components, including a range of benefits, some of which are explained below.
- Basic Salary: It is a fixed amount that an employee receives directly from the employer. It doesn't include incentives, bonuses, or any additional perks. Basic salary is always lower than both the gross salary and the take-home salary.
- HRA or House Rent Allowance: It is an allowance provided by an employer to an employee to cover accommodation expenses which can be utilized by the employee to meet the rental costs of their residence near their workplace. HRA applies to both individuals, whether you are salaried or self-employed.
- EPF or Employee Provident Fund contribution: Both an employer and employee contribute 12% of the employee’s basic salary towards the EPF every month.
- Special Allowance: It includes extra allowances provided by employers to employees, like transport, conveyance, or outstation allowances, which are in addition to the basic benefits and allowances.
- Perquisites: These are extra benefits given to an employee on top of their regular salary and specific allowances that come with a certain position in an organization. These benefits could be in the form of monetary and non-monetary depending on the company. These perquisites can be taxable or not depending on the type of benefit you receive.
- Special Arrears: Many of us are familiar with the term "Arrears." In the context of salary, arrears refer to the additional amount paid to an employee due to a salary increase.
- Bonus: An employee might receive an extra amount as a bonus during the year, based on overall performance.
Components Excluded in Gross Salary
Here are the items that are not included in the gross salary given to an employee:
- Reimbursement of Medical Expenses: Amounts reimbursed for expenses like travel, medical, or phone bills are not part of the gross salary.
- Gratuity: Gratuity is a special payment made by employers to show appreciation for an employee's service. It is given when someone retires or leaves the company. However, according to Section 10(10) of the Income Tax Act, an employee must work for at least 5 years in a company to get gratuity. Gratuity is part of your taxable income.
- Free Meals Provided By The Employer: Free meals provided by the employer are not counted as part of the gross salary. It is considered a separate benefit and not included in the total salary amount.
- Leave Encashment: When an employer pays you for your unused leave, that extra payment you receive is not included in the gross salary. It is considered a separate benefit and isn't part of your regular earnings.
Calculation Behind Gross Salary
Gross salary is your total earnings before any deductions like taxes or provident fund. It includes your basic salary and allowances like HRA. To get it, just add up your basic salary and these allowances. That’s your total before deductions.
Gross salary = Basic salary + HRA + Other Allowances
Let’s understand this with an example:
| Component | Amount (in ₹) |
|---|---|
|
Basic |
25,000 |
|
House Rent Allowance |
9,000 |
|
Transport Allowance |
1,300 |
|
Income Tax |
2,000 |
|
Statutory Bonus |
1,600 |
|
Provident Fund |
2,400 |
In this case, your gross salary can be calculated as below:
Total Gross salary = Basic Salary + HRA + Other Allowances
Gross salary = ₹25,000 + ₹9,000 + ₹1,300 + ₹1,600
Gross salary = ₹36,900
Remember, Provident Fund and Income Tax don’t affect the calculation of gross salary because it is determined based on the total yearly income before any deductions are taken into account.
Difference Between Gross Salary and Basic Salary?
| Gross Salary | Basic Salary |
|---|---|
|
It is a monthly or annual salary paid without tax deductions
|
Basic salary is paid before adding any benefits or perquisites. |
|
Includes bonuses, overtime pay, allowances, and other perks |
The core amount received by the employee is the basic salary, It is used for calculations like HRA, and PF deductions. |
Difference Between Gross Salary and Net Salary?
| Gross Salary | Net Salary |
|---|---|
|
The total amount an employee receives before any tax deductions.
|
The final amount received by an employee after all deductions.
|
|
Gross salary = Basic Salary + HRA + Other Allowances |
Net salary = Gross salary - Income tax - Provident Fund - Professional tax |
The New Tax Regime 2023-2024
| Range of Income | Tax Rate |
|---|---|
|
Upto 3,00,000
|
Nil |
|
3,00,000-6,00,000 |
5% |
|
6,00,000-9,00,000 |
10% |
|
9,00,000-12,00,000 |
15% |
|
12,00,000-15,00,000 |
20% |
The government wants people to switch to the new system, which has lower tax rates. However, in the new system, you can’t claim various exemptions and deductions like HRA, LTA, 80C, 80D, and more, but also have some benefits like:
- If your income is up to ₹7 lakhs, you won't have to pay any tax under the new system, whereas, in the old system, this limit was ₹5 lakhs.
- Govt. simplified the tax slabs and increased the tax exemption limit to ₹3 lakhs.
The Old Tax Regime
| Total Income | Tax Rate |
|---|---|
|
Upto ₹2,50,000
|
0% |
|
₹2,50,000 to ₹5,00,000 |
5% |
|
₹5,00,000 to ₹10,00,000 |
20% |
|
Above ₹10 Lakh |
30% |
Opting for the old tax regime allows you to claim a variety of income exemptions, including up to ₹1.5 lakh under Section 80C of the Income Tax Act.
Sections 80C and 80D are widely used by salaried individuals to save on income taxes. If you invest in specific tax-saving options, you can claim deductions of up to ₹1,50,000.
Popular tax-saving schemes under Section 80C are the following:
- Life Insurance Premiums (LIC)
- National Pension System (NPS)
- Equity Linked Savings Scheme (ELSS)
- Public Provident Fund (PPF)
- Senior Citizens Savings Scheme (SCSS)
- National Savings Certificate (NSC)
- Employee Provident Fund (EPF)
- Unit Linked Insurance Plans (ULIPs)
- Sukanya Samriddhi Yojana (SSY)
- Home Loan’s Principal Repayment Amount
- Tax Saving FD
Conclusion
In conclusion, understanding your gross salary, the latest tax regime changes, and how they affect your net and basic salary is important for every employee and investor, for making informed financial decisions. It helps you navigate the complex world of taxation and plan your finances wisely.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
