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Learn about the meaning, components, and differences between gross salary and net salary, and learn how to calculate your net pay from your ctc
You’ve just started working and are confused about the difference between gross salary and net salary.
Gross salary is what an employee receives as the total salary package from an organization which includes basic pay, benefits, and taxes. Net salary on the other is what the employee receives in-hand after all the deductions are made.
Financial jargon like Gross Salary, Net Salary, CTC, and in-hand salary can be confusing. Hence in this article, we will explore everything from their meanings, differences, and how to calculate them accurately.
Let's try to get a clear understanding of these terms and navigate your compensation package with confidence.
This article is for informative purposes and does not represent the salary structure for any particular organization
Meaning of Gross Salary
Gross Salary is the sum of all the components that make up your salary package as an employee. These are your earnings before all mandatory and optional deductions.
You should get a detailed breakdown of all the components that make up your gross salary and your benefits in your employee salary slip.
Gross annual income and annual gross compensation are terms used interchangeably to describe the total earnings an individual receives in a year, encompassing salary, bonuses, commissions, and other forms of compensation.
In essence, these terms represent the same concept of the overall income earned before any deductions are made.
Components of Gross Salary
- Basic Salary: It is the fixed portion of the salary and forms the foundation of the salary structure. Other allowances and benefits are calculated based on the basic salary.
- Dearness Allowance (DA): DA is an allowance provided to employees to help them cope with the rising cost of living. It is usually calculated as a percentage of the salary and may vary based on inflation rates.
- House Rent Allowance (HRA): HRA is given to employees to cover their rental expenses. It is a percentage of the basic salary and varies depending on factors like the employee's location and the company's policies.
- Conveyance Allowance: This allowance is provided to employees to cover transportation expenses related to commuting to and from work.
- Leave and Travel Allowance: This allowance is given to employees to cover expenses related to travel during leaves or vacations. It can be used for various travel-related expenses such as airfare, accommodation, and sightseeing.
- Performance and Special Allowances: These allowances are given to employees as a reward for their performance or to compensate for special skills or responsibilities. The amount may vary based on individual performance or specific job requirements.
- Other Allowances: This category includes various additional allowances that may be provided by the employer based on company policies or industry standards. Examples include medical allowances, meal allowances, telephone allowances, and entertainment allowances.
Read more about Salary Slip components here.
How to Calculate Gross Salary?
The Salary components can vary among different organizations, we will take the following example to understand the calculation better -
Here’s a salary structure or ctc:
Gross Salary = Basic Salary + HRA + Special Allowance + L.T.A + P.F
Gross Salary = ₹3,50,000 + ₹1,75,000 + ₹81,600 + ₹70,000 + ₹23,400 = ₹7,00,000
The total Gross Salary is ₹7,00,000
What is CTC?
CTC in salary, or Cost to Company, is the total cost incurred by a company for employing an individual.
It encompasses various components like basic salary, allowances, and deductibles (such as taxes and provident fund). In most cases gross salary and CTC is the same amount.
In some cases, CTC can also include additional components such as ESOPs.
Meaning Of Net Salary
Net salary, commonly known as take-home salary, refers to the actual income received by an employee after deductions.
It represents the amount available for personal use and covers the earnings after deducting taxes, provident fund contributions, and other applicable deductions.
How To Calculate Net Salary
You must have heard terms like in- hand salary calculator. Here you’ll learn how to calculate your net salary without a salary calculator
Let's take the same example again -
The Gross salary as calculated before is ₹7,00,000
Net Salary = Gross Salary - (PF Employee Contribution (₹1800/month) + PF Employer Contribution (₹1800/month) +PF EDLI & Admin Charges (₹150/month) + Professional Tax (₹200/month) ) - Taxes.
As per the new tax regime if your CTC is under ₹7,00,00 there is no taxes applied.
But as the CTC increases there will be certain taxes applicable to your gross salary after the standard deduction is removed. Hence your net salary or in-hand salary will be credited after the taxes are applied.
Net Salary = ₹7,00,000 - (₹21,600 +₹21,600 +₹1,800 +₹2,400) = ₹6,52,600/year
Which will be ₹54,383/month.
This will be the in-hand salary that will be credited to your account
Gross Salary vs Net Salary
Here are some key differences between gross salary and net salary:-
1) Is CTC your gross salary?
Answer: CTC which stands for the cost to company is not your gross salary. Though they are very similar, CTC can include some additional elements such as Esops which are not included in your gross salary.
2) What is gross salary vs net salary vs ctc
Answer: CTC stands for cost to company which means the cost involved in hiring a potential candidate and has all components of a salary slip. Gross salary is inclusive of all the deductions. It includes salary before any taxes and includes all the allowances in the form of housing, and health provided by the company whereas net salary is calculated after making all the necessary deductions and taxes.
3) Is tax on net salary or gross salary?
Answer: Tax is deducted while calculating net salary, gross salary is inclusive of all deductions and taxes.
4) What is net pay in salary?
Answer: Net pay is calculated after deducting any deductions and taxes from gross salary. It can be written as
Net Salary = Gross Salary - deductions - taxes
P.S. - Now that you’ve started earning, how about starting to invest from now itself
The sooner, the better. Your future self will thank you for it. Take a look at this article if you’re interested in Savings & Investing in Digital Gold