Salaried employees are compensated by their employers and the pay that they receive is called their salary or compensation. An employee’s salary is divided into two main parts – gross salary and net salary. Let’s understand what gross salary is all about and how it is calculated.
Gross salary meaning – What is gross salary?
Gross salary, also called Cost to Company (CTC) is the total amount of salary that an employer pays an employee. It includes all the allowances and perquisites provided by the employer. The gross salary denotes the maximum compensation that the employer pays to each of its employees.
Gross salary can be expressed as an annual salary or as a gross monthly income. The monthly gross salary means the maximum monthly income that your employer pays while the annual amount is the aggregation of the monthly gross pay.
Components of gross salary
If you look at the salary slip or appointment letter of an employee, you would find that the gross annual salary is made up of different components. Some of the most common components of gross salary include the following –
Direct components
Indirect components
Here’s a detailed look into the components of the gross salary –
The basic salary is called the take-home salary which is paid to the employee without considering any allowances of perquisites. No deductions are allowed from the basic salary and it is also used for computing the eligible tax benefits that employees can claim on their allowances.
Called DA, in short, Dearness Allowance is the allowance paid to employees to meet the rising lifestyle expenses due to inflation. The Dearness Allowance is added to the basic salary and together they are called the basic pay on which various other benefits are calculated.
Called HRA in short, House Rent Allowance is a tax-deductible allowance that employers pay to employees to enable them to pay the rent of their accommodations. You can claim a tax deduction for the HRA received from the employer if you are living in a rented house subject to specified limits.
Called LTA or LTC in short, this allowance is paid to employees to enable them to take a vacation. LTA is a tax-deductible component of the salary wherein employees can claim deduction on the travel expenses incurred when taking the trip.
This allowance covers the cost of telephone, mobile or internet connection used by employees for business purposes.
This allowance is paid to cover the cost of using a vehicle for transportation of the employee from his/her residence to the place of work and back.
Special allowances include various other allowances that employers might offer their employees.
Employers might offer a lump sum bonus to employees annually linked to their performance or if the company makes a profit due to the employee’s efforts.
If employees work beyond the official working hours, they might receive additional payment for overtime.
Employers also offer meal coupons or vouchers that employees might use for paying for food items.
Employers might offer accommodation to their employees, the cost of which is borne by the employer. Similarly, the employer might pay the utility bills incurred by its employees every month.
If there is a salary hike or an increment in the salary, employees become entitled to receive arrears of salary.
Other benefits that do not form a part of gross salary
Employers might offer other benefits to their employees which do not form a part of their gross salary. These benefits include the following –
Difference between gross salary and net salary
As mentioned earlier, the salary of an employee is divided into two parts – gross salary and net salary. Both these salaries are different from one another. Here’s how –
Gross salary |
Net salary |
The CTC or the maximum salary that is paid by the employer. Here’s how to calculate gross salary – Gross salary = basic salary + HRA + other allowances |
The gross salary, minus, TDS, EPF contribution and professional tax is the net salary Net salary = gross salary – (TDS + EPF contribution + Professional tax) Net salary is also called the take-home salary |
It is higher than the net salary |
It is lower than the gross salary |
Example
Mr Verma joined ABC Limited with a CTC of INR 10 lakhs. The salary consists of basic pay of INR 7 lakhs, HRA of INR 2 lakhs and other allowances of INR 1 lakh. The EPF contribution is INR 80,000, TDS is INR 1 lakh and professional tax is INR 50,000. Here’s how to calculate gross salary and net salary –
Basic pay |
INR 7 lakhs |
House Rent Allowance (HRA) |
INR 2 lakhs |
Other allowances |
INR 1 lakh |
Gross annual salary |
INR 10 lakhs |
Less: EPF contribution |
INR 80,000 |
Less: TDS |
INR 1 lakh |
Less: Professional tax |
INR 50,000 |
Net salary |
INR 770,000 |
Difference between gross salary and basic salary
Gross salary and basic salary are two different concepts that should not be confused to be the same. Here are the main differences between the two –
Gross salary |
Basic salary |
It is the maximum salary paid by the employer. It includes the basic pay and all the allowances |
It is a part of the gross salary. It is the amount paid by the employer without factoring in the allowances and perquisites |
It is a higher amount |
It is lower than the gross salary |
What is the Cost to Company?
The Cost to Company (CTC) is another name for gross salary. It is the cost that the company incurs in employing an individual. CTC denotes the maximum compensation paid by the company to an employee inclusive of the basic pay, allowances and perquisites. Moreover, if there are EPF contributions, gratuity payments or superannuation benefits payable to employees, they are also added in calculating the CTC. The CTC can be divided by the number of months to ascertain the gross monthly remuneration that you would be eligible for.
Calculation of PF from gross salary
Organisations that employ 20 or more employees have to register with the Employees’ Provident Fund Organisation (EPFO) for paying EPF to employees. For organisations having less than 20 employees, EPF registration is voluntary.
Moreover, employees earning less than INR 15,000 per month as basic pay and Dearness Allowance have to mandatorily have an EPF account. For employees having a higher salary, EPF is a voluntary saving.
Whether mandatory or voluntary, EPF savings have become a common component of most organisations. Under EPF, 12% of the employee’s basic pay and dearness allowance is directed to the EPF account every month. Employers also contribute the same amount but 8.33% of the employer’s contribution, subject to a limit of INR 1250, is directed to the Employees’ Pension Scheme (EPS) while the remaining is retained in the EPF account.
Here’s an example –
Say your basic pay + Dearness Allowance is INR 20,000. The EPF contribution would be as follows –
Employee’s contribution |
12% of 20,000 = INR 2400/month |
Employer’s contribution |
12% of 20,000 = INR 2400/month |
Division of employer’s contribution – |
|
EPS scheme |
8.33% of 20,000 = INR 1666 Maximum limit = INR 1250 Actual contribution = INR 1250 |
EPF scheme |
2400-1250 = INR 1150 |
PF calculation is done on the basis of the basic salary and the dearness allowance. The gross monthly remuneration is not used for PF calculation because it consists of other allowances too which are not included in the salary when calculating the EPF contributions.
Definition of gross salary under Section 17(1)
Section 17(1) of the Income Tax Act, 1961 lays down a specified definition of the term ‘gross salary’. According to this section, the gross pay meaning includes the following benefits received from an employer –/
How is gross salary taxed?
When calculating the tax liability, the gross pay is subject to tax-free deductions and exemptions after which the tax liability is calculated. The following are deducted from the gross salary to calculate the amount of salary that would be subject to tax –
After all these deductions and exemptions are deducted from the gross pay, the tax liability is computed as per the applicable income tax slabs. For the financial year 2021-22, the income tax slab rates are as follows for resident Indian individuals aged up to 60 years –
Income level |
Tax liability |
Up to INR 250,000 |
Nil |
INR 250,001 to INR 500,000 |
5% of the income exceeding INR 250,000 |
INR 500,001 to INR 10,00,000 |
INR 12,500 + 20% of the income exceeding INR 500,000 |
INR 10,00,001 and above |
INR 112,500 + 30% of the income exceeding INR 10,00,000 |
If you are aged 61 years and above, the tax slab would be as follows –
Income level |
Tax liability |
Up to INR 300,000 |
Nil |
INR 300,001 to INR 500,000 |
5% of the income exceeding INR 300,000 |
INR 500,001 to INR 10,00,000 |
INR 10,000 + 20% of the income exceeding INR 500,000 |
INR 10,00,001 and above |
INR 110,000 + 30% of the income exceeding INR 10,00,000 |
Example
Say your gross salary is INR 20 lakhs and other details of the salary are as follows –
The tax would be calculated as follows –
Gross salary |
INR 20,00,000 |
Less: Standard deduction |
INR 50,000 |
Less: HRA exemption |
INR 100,000 |
Less: LTA exemption |
INR 50,000 |
Less: 80C deduction |
INR 150,000 |
Less: NPS deduction under Section 80CCD (1B) |
INR 50,000 |
Less: 80D deduction for health insurance |
INR 50,000 |
Taxable salary |
INR 15,50,000 |
Tax payable |
INR 112,500 + 30% of 550,000 = INR 112,500 + 165,000 = INR 277,500 |
Alternative ways to save taxes
To reduce your tax liability you can use various ways to save taxes as the Income Tax Act, 1961 allows different types of deductions and exemptions. The ways in which you can save taxes include the following–
Section 80C allows a deduction of up to INR 1.5 lakhs. Make use of the full limit of the section by investing in –
Health insurance premiums earn you a deduction under Section 80D up to INR 1 lakh. So, invest in suitable health insurance policies for yourself and your parents.
If you buy a home and avail of a home loan, you can get dual tax benefits. The principal paid would be allowed as a deduction under Section 80C while the interest paid would be allowed as a deduction under Section 24(b) up to INR 2 lakhs. Moreover, if you are a first-time homebuyer and the stamp duty value of the property is within INR 45 lakhs, you can earn an additional deduction of up to INR 1.5 lakhs under Section 80 EEA on the home loan interest paid.
So, if you are a salaried employee, understand the gross salary meaning, how it is calculated and its components so that you can understand your compensation.
You can check the gross salary from your appointment letter or salary slip issued by the employer. Form 16 also contains the details of the gross monthly income that you are eligible to receive.
Every employer has different components of the gross salary. As such, when you switch jobs, the gross salary is likely to change because your compensation might change.
Professional tax is a tax that is levied on your salary. The amount of professional tax depends on the state in which you live.
Yes, a new tax regime has been introduced wherein the tax slab rates are different. The rates are as follows –
Income level |
Tax liability |
Up to INR 250,000 |
Nil |
INR 250,001 to INR 500,000 |
5% of the income exceeding INR 250,000 |
INR 500,001 to INR 750,000 |
INR 12,500 + 10% of the income exceeding INR 500,000 |
INR 750,001 to INR 10,00,000 |
INR 37,500 + 15% of the income exceeding INR 750,000 |
INR 10,00,001 to INR 12,50,000 |
INR 75,000 + 20% of the income exceeding INR 10,00,000 |
INR 12,50,001 to INR 15,00,000 |
INR 125,000 + 25% of the income exceeding INR 12,50,000 |
INR 15,00,001 and above |
INR 187,500 + 30% of the income exceeding INR 15,00,000 |
You can choose either the old tax slab or the new one for calculating your tax liability. However, under the new regime, no deductions would be available.