Our careers play a crucial role in making us responsible individuals. For some people, a career or a job is just to pass time, for others it may be a decent source of income, and for a few, it’s life. Therefore, we see a large number of people joining the active workforce on a daily basis. Also, not to mention the excitement associated with your first job is always indefinable. But, to your surprise, the first salary you receive leaves you baffled, because the salary mentioned by the company was X rupees and you must have received less than the said amount. ‘Where’s the rest?’ is the most common question asked by a fresher.
However, not many know the subtle difference between take-home salaries, cost to company, and gross salary. Let us discuss one of these important elements i.e. Gross Salary in detail.
The employees who are paid for their services are offered gross salary as their CTC (cost to company). Cost to the company is the amount that the company will have to incur on an employee for a specific year. But, the point to remember here is that cost to the company is never equal to the amount of money one gets to take home.
In literal terms, Gross Salary is the monthly or yearly salary before any deductions are made from it.
OR
A gross salary is a gratuity and EPF (employee provident fund) subtracted from the cost to the company. The components of Gross salary consists of the following:
Basic Salary
House rent allowance
Special Allowance
Conveyance Allowance
Educational Allowance
Medical allowance
Leave travel allowance, etc.
Components that form a part of Gross salary are listed below:
Other components such as the salary arrears, remuneration or fee, overtime payment, and performance related cash awards.
Benefits like rent for accommodation, electricity, fuel charges, and water.
Allowances such as the travel allowance, medical allowance, leave travel allowance etc.
Let us look at some of the above components in detail
Basic Salary: Basic salary is the exact amount paid to an employee before any deductions are made or extra components are added to the salary. Besides, the basic salary is always lower than the gross salary or the take-home salary.
Perquisites : These are considerable amount of benefits received by an employee as a result of his/her position in an organization and are payable in addition to the salary received by them. Besides, these benefits can be taxable as well as non-taxable depending upon their nature.
Salary Arrears : Most of us are well versed with the term arrears. To define, arrears refers to an amount that is paid as a result of a hike or increment in your salary.
HRA (House rent allowance) : A House Rent Allowance is also one of the major salary components paid by the employer to their employees for accommodation expenses. Also, the HRA is applicable to both salaried and self- employed individuals.
Components that do not form a part of Gross Salary
There are few components that do not form a part of gross salary paid by the employer to an employee of his organization such as:
Refreshments and snacks provided by the employer to his employees during the office hours.
Reimbursement for travel and food expenses for official/business purposes
| Gross Salary | Net Salary |
|---|---|
| Gross Salary is the amount of salary after adding all benefits and allowances but before deducting any tax | Net Salary is the amount that an employee takes home |
| An individual's gross salary includes benefits like HRA, Conveyance Allowance, Medical Allowance etc. | Net Salary = Gross salary - All deductions like Income Tax, Pension, Professional Tax etc. It is also known as Take Home Salary |
| Basic Salary | Gross Salary |
|---|---|
| Basic salary is the amount paid to an employee before any extras are added or taken off. It does not include any allowances, overtime or any extra compensation | Gross Salary is the amount of salary after adding all benefits and allowances but before deducting any tax |
| For Example: An employee has a gross salary of Rs. 50, 000 and basic salary of Rs. 20, 000, then he/she will get a Rs. 20,000 as a fixed salary. |
The Cost to Company (CTC) is the amount decided by the company while recruiting an employee. It involves other elements such as the House Rent Allowance (HRA), Gratuity, Provident Fund (PF), and Medical Insurance among other allowances which are added to the basic salary. In other words, CTC is a term for the total salary package of an employee. It indicates the cumulative amount of expenses an employer spends on an employee during one year.
A CTC consists of the sum total of Direct Benefits (sum paid to an employee on a yearly basis), Indirect Benefits (sum the employer pays on behalf of the employee), and Saving Contributions (saving schemes he/she is entitled to). Therefore, CTC = Direct Benefits + Indirect Benefits + Savings Contributions.
The amount received post subtracting gratuity and the employee provident fund (EPF) from Cost to Company (CTC) is called as Gross Salary. In other words, Gross Salary is the amount paid before deduction of taxes or deductions and is inclusive of bonuses, over-time pay, holiday pay etc.
The EPF, in India, is an employee-benefit scheme recommended by the Ministry of Labour which provides employees with an income during their retirement years. The EPFO or Employee Provident Fund Organization has the authority to mandate policies on EPF, pension, and insurance schemes. However, the employer is required to contribute at least 12% of the employee’s salary towards his/her EPF.
An Employee can also withdraw the full amount accumulated in his/her PF account at the time of retirement, which is when the employee attains the age of 55 years. Although, he/she can also withdraw the PF amount in case of the following situations:
If the employee is migrating abroad
In case the employee is retired due to permanent disability
Termination of services
The calculation of Gross pay for the purpose of PF calculation is different than that used in the payroll context. Let us consider PF Gross to denote the salary to be considered for PF calculation.
PF Gross includes Basic, DA, Conveyance, Other Allowance etc. (heads of pay which are included for PF calculation). It excludes House Rent Allowance, Bonus etc. (heads of pay which are excluded for PF calculation) as per the provisions of the PF Act.
To calculate Income Tax, gross salary minus the eligible deductions are considered. For instance: you will have to subtract HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.
Please note: The taxation process is different for self-employed and salaried individuals.
As per section 17(1), salary includes the following amounts received by an employee from his employer, during the previous year.
Wages
Any advance of salary
Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages
The contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in Section 8OCCD.
Any payment received by an employee in respect of any period of leave not availed of by him; (Leave encasement or salary in lieu of leave).
The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognized provident fund to recognized provident fund.
The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule.
Sumit works as a Marketing manager with ABC Group Ltd. His gross salary per month is Rs.70,000 while his net-take home is just Rs. 56,000.
Salary Components
Basic Salary = Rs.25,000
HRA = Rs.20,000
LTA = Rs.10,000
Travel Allowance = Rs.15,000
Total = Rs.70,000
Deductions:
Provident Fund – Rs. 3000
Income Tax - Rs. 1500
Profession Tax - Rs. 500
Loan Deduction - Rs. 9000
Total Deductions - Rs. 14,000
Therefore, Net Salary = Gross Salary – Deductions = Rs.70,000 – Rs.14,000 = Rs.56,000.
To calculate Income Tax, gross salary minus the eligible deductions are considered. For instance, you will have to deduct HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.
