Everybody knows about this but when it comes to the jargon of financial documents we feel lost. Let's understand everything about Gross Salary and Net Salary.
You've just begun working and aren't sure how much you'll make at the end of the month?
Don’t worry, we’ve got you. Salary is the payment you get from your employer every month in return for the services you provide to them. Correct?
This amount is referred to as Gross Salary. But do you know why there’s a difference between your gross salary and net pay? Let’s dive in.
What is 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 such as income tax, Provident Fund, medical insurance, and so on.
Overtime pay and incentives are all included in your gross salary.
You should get a detailed breakdown of all the components that make up your gross salary and your benefits in your employee pay slip.
What are the components of your Gross Salary?
- Basic Salary
- Dearness Allowance (DA)
- House Rent Allowance (HRA)
- Conveyance Allowance
- Leave and Travel Allowance
- Performance and Special Allowances
- Other Allowances
Read more about Salary Slip components here.
Difference between Gross Salary and Net Salary:
Now comes the crucial part,
How to Calculate your Gross Salary?
It’s pretty simple, once you’re clear with all the components correctly and accurately. Let’s understand it better with an example.
Suppose there’s Afreen.
Afreen works at an IT firm. Here’s her salary structure:
So, as per the gross salary formula, which is:
Gross Salary = Basic Salary + HRA + Other Allowances
Gross Salary = ₹5,00,000 + ₹45,000 + ₹1,55,000
Gross Salary = ₹7,00,000
Afreen’s Gross Salary is ₹7,00,000.
How to calculate your Net Salary?
Net salary formula is:
Net Salary = Gross Salary - All deductions (Income Tax, PF, Gratuity, etc)
Based on Afreen’s salary structure, she falls under the tax slab of 10%, which is for employees with ₹5,00,000 to ₹7,50,000.
Hence, she’s liable to pay ₹33,637 as tax.
Now, her net salary would be:
Net Salary = 7,00,000 - 33,637 - 84,000 - 29,629 = ₹5,52,734
And that’s how you can calculate your own gross and net salary. It’s a little juggling with numbers, but nothing too confusing once you get a hang of it.
All you have to do is apply those formulas. Good luck!
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.