Income Tax

Difference Between Gross Salary and Net Salary

Dec 01, 2021
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One of the most awaited days in the month – the day you get your paycheck is round the corner and you cannot help but plan out all the things that you wish to do with that fat paycheck. But having a little difficulty with the jargon being used? Wish to know what exactly is the difference between gross and net salary? Then you have come to the right place!

Need to understand terms

Salary is the regular payment that is made by the employer to his or her employee in exchange for the work performed or the services rendered by the employee for a specific period of time. This is usually paid on a periodic basis, say monthly, and is expressed, in aggregate, as an annual sum. A clear understanding of what constitutes gross salary, CTC and net salary is important as – 

  • It will help one understand the exact amount of disposable income he or she has.
  • It will help them calculate his or her tax liability. 
  • It will help one plan his or her finances. 

What is gross salary?

This refers to the amount of compensation that an employee receives prior to any sort of tax or deduction. It is the total sum that the employee has made by virtue of his or her work in the company for a specific period of time. It includes the basic salary that the employee and the employer have agreed upon as the pay during the time of signing the contract of employment along with overtime pay, bonuses and other additional sums. This however, does not have any deduction. The difference between CTC and bonus amount will be one’s gross salary.

What is CTC?

CTC or Cost to Company is a term used to denote direct and indirect costs that the company has to incur while making a payment of the salary to the employee. CTC is a better metric to determine the complete cost of employment of an individual in the workplace.

The CTC would include the following – 

  1. Direct benefits such as the CTC salary, the special compensatory allowance, the bonus and incentive pay, the dearness allowance, medical allowance, conveyance or transport allowance, leave travel allowance, house rent allowance, telephone allowance.
  2. Indirect benefits would include electronic duty rates, health care costs, company leased accommodation, taxis for commute, subsidised meals, loans to employees, income tax savings, office space rent.
  3. Savings contribution would include superannuation benefits, employee provident fund contribution and gratuity.

What is net salary?

The net salary or the take-home salary would amount to the difference between the gross salary and the total deductions. Total Deductions would amount to the sum of Professional tax, EPF (Employee Contribution), EPF (Employer Contribution) and Employee Insurance. Please note that a few of the components that are deducted from the gross salary does not go to the government but is accounted for as your long term savings such as EPF.

The net salary is usually lower than the amount that is calculated as gross salary. The only circumstance when this is not the case is when there are no taxes to be paid by the employee as the amount falls below the tax slabs prescribed by the government.

The difference between gross and net salary - how does it impact your taxes? 

Gross salary

Net salary

It is the amount that the employee earns in the whole year's sans deduction.

It is the amount that the salaried employee gets after deduction.

It is the maximum amount of salary that the employee can get inclusive of all taxes.

It is less than the gross salary post deduction of taxes.

It is inclusive of benefits such as bonuses, overtime pay, etc.

This is exclusive of all other fringe benefits.

Obtained from CTC after subtracting EPF and retirals.

Obtained from subtracting deductions and income tax from gross salary.

Gross salary is usually higher than net salary.

Net salary is lower than gross salary unless the income tax liability of the employee is zero.

Suresh earns a good sum from his IT job. His CTC is INR 4,00,000 while his basic salary is INR 2,20,000. The HRA is INR 88,000, CA is INR 19,200, Medical Expenses are INR 15,000, EPF Contributions by the employer are INR 21,600, Gratuity is INR 18,326 and Special Allowance is INR 17,874. 

His gross salary is calculated as INR 4,00,000 (CTC) - INR 21,600 (EPF) - INR 18,326 (gratuity) = INR 3,60,074. This amount will be his gross salary, which is his total personal income before taking taxes and other deductions into consideration.

Suresh falls within the INR 2,50,001- INR 5,00,000 tax slab and hence, he will have to pay 10% as his income tax. Therefore, his net salary will be INR 3,60,074 (gross salary) – INR 36,007.4 (tax) = INR 3,24,066.6.

Zubin, on the other hand, earns INR 2,00,000 as his CTC and his gross salary is INR 1,50,000. Since he is below the income tax slab limit and his tax liability is equal to zero, his gross and net salary will be the same.

Please note: Form 16 is a certificate that is issued under Section 203 of the Income Tax Act by the employer indicating the amount of tax deducted at source while paying the salary of the employee. This is a valuable source to determine how the tax was computed, the deductions allowed, the investment declarations of the employee were made etc. It can be referred to understand all the terms mentioned above in a practical sense.

Conclusion

All these components of one’s salary can be calculated with the help of a salary calculator available online. It is a useful tool that can be used to calculate all these by yourself and get fairly accurate information about what is the actual reward that you receive for the number of hours that you put in. Once you understand the import of the terms above, then calculating it becomes a much easier task. Invest some time to derive maximum benefits out of this!

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