Gross Salary

Gross salary is the sum of net salary (basic salary + allowances) and deductions. An employee receives a net salary for every month, which he takes to his home, and deductions are done for paying taxes and provident funds.

This is the basic information about net salary and gross salary. An employer fixes the basic salary of an employee and based on this basic salary, the employee gets other allowances. Every organization has different criteria for providing allowances. For example, if an employee gets Rs. 25000 as a basic salary, then he will get 5 % of basic salary as HRA, 8 % of basic salary as medical allowance and other allowances.

How is the gross salary calculated?

Gross Salary = CTC - PF - Gratuity 

This is the formula for the calculation of gross salary. In simple terms, gross salary can be understood as the monthly or yearly salary without any deductions from it. Let’s understand the various components of this formula:

• Cost To Company (CTC) is the amount that a firm or a company will have to incur on the employee for a specific period such as a year.  Now, removing components like Provident fund contribution and Gratuity, and the amount you are left with is called Gross Salary. That is why the CTC of the company never equals the amount of money taken to home by an employee. It is the total amount of money that is decided by an employer when he recruits an employee for his organization. CTC includes many things such as HRA, PF, Gratuity, medical insurance, and other allowances that are added to the basic salary. On the other hand, an employee can also understand that CTC is the total salary package which an organization paid to an employee yearly. CTC consists of the total sum of direct benefits and indirect benefits and all saving contributions.

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

• Provident Fund (PF) on gross salary The calculation of the gross pay for provident fund calculation is different from the payroll context. Provident fund includes Basis salary, DA, conveyance, and other benefits that are based on the provident fund act.

Gross salary consists of the following components:

• Basic salary
• Special allowance
• House rent allowance
• Travel/commute allowance
• Medical allowance
• Educational allowance
• Leave travel allowance

 Other components included in gross salary are:

• Accommodation rent, bills for electricity, phone, fuel charges and water as well can be claimed by the employee from the company.
• Payment for overtime work 
• cash/ or cash related rewards from the company.

Important Components in the Calculation of the Gross Salary

Basic salary: Money that is paid to an employee without making any deductions or adding an extra component to the salary is called Basic salary. It is mentioned in the salary structure. Basic salary is lower than the gross salary but it is a part of the amount taken home by the employee.

Allowance: Allowances are the fixed amount of money that is paid to the employee from an employer apart from the basic salary. Allowances include medical allowance, travel allowance, house rent allowance, and many more.

Perquisites: Extra benefits received by an employee because of his or her position in the organization. These perquisites' benefits may be non-taxable or taxable depending on their nature. The amount of perquisite added to the salary is received by an employee by the employer directly.

Salary Arrears: The term arrears is defined as the amount of money of an increment or a hike in your salary. This amount of money is earned by an employee but was not paid to him due to some reason, the amount is paid or compensated as a salary arrear in the next month's salary.

House rent allowance (HRA):  HRA is given to an employee for his or her accommodation purposes. HRA amount is based on the location of stay of the employee. If the employee stays in the metro city then he/she is entitled to upto 50% of his basic salary, while employees staying in rural or other areas then he is entitled only upto 40% of his basic salary. The employee can avail tax reductions on the amount he receives as HRA.

Medical allowance: Employees receive an amount monthly from their employer  for medical expenses. Medical allowance is also a taxable part of the income as the government has declared it as income from other sources, therefore it cannot be claimed for reimbursement.

Special allowance: This is a fixed amount of money which is given to all employees and it may be above the basic salary. There are different categories for special allowance such as children's education allowance, hostel allowance, uniform allowance, outstation allowance, tribal area allowance, and many others. This allowance is coming under the taxable category after a specific limit of exemption.

Leave travel allowance (LTA): LTA is a traveling allowance provided to an employee from his or her employer who is traveling or on leave to complete the official work. LTA is one of the important components of the salary of an employee as LTA is exempted from the income tax.

Most of the above-listed allowances are part of gross salary. It is important for an employee to know what components are not part of the gross salary paid by an employer of his organization.

Components which are not included in gross salary

• Snacks and refreshments were given to all employees by their employer during office time.
• Reimbursement for the food expenses and travel expenses which expand on official or business purposes.

Understanding the Difference between Gross Salary and Net Salary

Gross salary is the initial amount dedicated to the employee prior reductions for EMF, HRA, CTC, and gratuity.

Gross salary = Basic salary + Special allowance

Net salary = Gross salary – (Professional tax – Public provident fund contributions – Income tax)

Now, an employee knows what is gross salary and what components are included but it is also beneficial for an employee to know how to calculate gross salary. If an employee knows about gross salary and calculation, then he or she also cross-check that either he or she is getting the exact amount of money as a salary or not. So, know about the calculation of gross salary.

Example of Gross Salary Calculation

To calculate the income tax for an employee, subtract the required deductions from the gross salary. Keep in mind that the tax calculation process is different for salaried employees and self-employed persons.

Just take an example to understand the gross salary calculation. For example, an employee works as a senior manager in the organization ABC group Pvt ltd. The employee said that his gross salary per month is Rs. 70000 while his net salary is Rs. 56000 which he takes to his home.  Now, understand how much allowance amount he is getting.

Salary components included in gross salary:

• Basic salary = Rs. 25000
• HRA = Rs. 20000
• Leave travel allowance = Rs. 10000
• Travel allowance = Rs. 15000
• Total = Rs. 70000

Know about all deductions which are made from gross salary so that an employee knows about his net salary.

Deductions:

• Provident fund = Rs. 3000
• Income tax = Rs. 1500
• Profession tax = Rs. 500
• Loan deduction = Rs. 9000
• Total deductions = Rs. 14000

Hence, net salary = gross salary – deductions = Rs. 70000 – Rs. 14000 = Rs. 56000.

It’s Beneficial to Know how your Salary is Calculated 

When an employee works in an organization for any post, it is sure that the employee is interested to know about his salary structure. The salary structure mainly includes basic salary, gross salary, and net salary. It is good to know how to calculate basic salary, gross salary, and net salary.

An employee must know what other benefits or allowances he or she is getting and what deductions are made from salary. Several government acts are also made for the benefits of all employees.

Gross salary is the amount of money that an employee earned while working in an organization. As an employee, it is your right to know about all things which are deducting your money.

FAQs on Gross Salary

End Note:

A clear understanding of the inner workings of how gross salary works is essential knowledge to any employee. Understanding gross salary will help you make sure that the take home salary you are receiving currently is correct and the correct deductions have been made. This will also help you claim the right tax exemptions for the right amounts that someone with your salary quote can claim.