What is Gross Salary?
Gross Salary is the total amount an individual earns before any tax deductions they incur. It is typically calculated annually but can also be calculated monthly or weekly. It acts as the initial point for various financial calculations like income tax, employee benefits, loan eligibility, etc. It also helps in assessing the earning potential of individuals, essential for personal decision-making.
What are the components of Gross Salary?
The basic components of gross salary are as follows:
- Basic Salary: The fixed portion of salary, agreed upon by the employer and employee.
- House Rent Allowance (HRA): It is the allowance that covers the rental expenses of employees.
- Employee Provident Fund (EPF): It is the mandatory retirement saving scheme covering contributions of both employees and employers.
- Perquisites: It is any additional benefits provided by employer, like company car or company accommodation.
- Special arrears: It is special or additional payments, like salary revision, promotional bonus etc.
- Special Allowance: They are customizable additional benefits, that vary from employers like travel or phone expenses.
- Bonus: It is a form of additional payment made to employees based on their performance or the company’s financial gains.
The components excluded from the gross salary are:
- Medical reimbursement: It is the reimbursement of actual medical expenses incurred by an employee or their family members.
- Leave Travel Allowance (LTA): It is a form of tax exemption on the employee expenses during travel on holidays.
- Free meal and refreshment: Coupons issued by the company on free meals or discounted meals and refreshments.
- Gratuity: Lumpsum amount of gratuity paid to employees for their life-long service, usually paid during retirement, resignation, or death.
Let’s try to understand this through an example, shall we?
How to calculate Gross Salary?
To calculate the gross salary of an employee, add the components of salary.
The formula to calculate gross salary is,
Gross Salary = Basic Salary + HRA + Employees PF (Provident Fund) + Perquisites + Special arrears + Special allowance + Bonus
Gross Salary example:
Aakash is an employee of XYZ firm, and his salary component looks like:
|Components||Amount (Annual, INR)|
|House Rent Allowance||10,000|
|Employee PF Allowance||4,000|
Using the formula,
Gross Salary = Rs. 40,000 + Rs. 10,000 + Rs. 4,000 + Rs. 3,000 + Rs. 2,000 + Rs. 5,000 + Rs. 8,000 = Rs. 72,000
Thus, his gross salary is Rs. 72,000.
How to calculate CTC (Cost to Company) from Gross Salary?
While calculating the CTC of an employee from their gross salary, a range of factors like benefits, taxes and allowances are considered.
General formula to calculate CTC from Gross Salary,
CTC = Gross Salary + Employer PF + Medical Insurance + Bonus + Allowances + Other benefits
Example of calculation of CTC from Gross Salary:
Let us consider the salary structure of an employee,
|Components||Amount (Annual, INR)|
|Employer PF||10% of basic salary (3,000)|
|Medical Insurance||5,000 (per month)|
|Allowances||8,000 (per month)|
|Other benefits||15,000 (per month)|
Using the formula,
CTC = Rs.60,000 + Rs.3,000 + Rs.5,000 + Rs.1,20,000 + Rs.8,000 + Rs.15,000
CTC = Rs. 2,11,000
So, the employee’s CTC is Rs. 2,11,000.
Taxation process of Gross Salary
The taxation process involves deducting various taxes from the employee’s initial earnings. A brief overview of the taxation process is:
- Income tax calculations: Determine the income tax liability by making the necessary deductions and exemptions.
- Tax slabs and rates: Applying the prevailing tax slabs and tax rates based on the income levels.
- TDS (Tax Deducted at Source): Employers deduct and deposit the tax on the behalf of employees, it is determined based on current tax liability.
- Form 16: A form that summarizes salary, tax and other details acts as the financial statement of income and tax for a year.
- Income Tax Return Filing: Employees submit income tax returns (ITR) files that act as a report of their income, and claim needed tax exemptions.
The tax rates for the Financial Year 2023-24, as per the new regime is:
|Tax Slab||Tax Rate|
|Up to Rs. 3,00,000||Nil|
|Rs. 3,00,001 – 6,00,000||5%|
|Rs. 9,00,001 – 12,00,000||15%|
|Rs. 12,00,001 – 15,00,000||20%|
|Above Rs. 15,00,000||30%|
Frequently Asked Questions (FAQs)
Is gross salary taxable?
Yes, gross salary is taxable. It is the initial earnings of an individual, and various taxes and other deductions are made later, based on the prevailing tax regime and regulations.
Is PF included in gross salary?
Yes, PF (Employee Provident Fund) is a part of the employee’s gross salary, as it is an essential part of the employee’s earnings before any deductions.
What is net monthly salary?
Net monthly salary is the amount an employee receives after making deductions from their gross salary.
What is the difference between gross salary and basic salary?
Basic salary is the fixed part of an employee’s earnings, while the gross salary includes bonuses, allowances, and benefits, before making any deductions.
What is the difference between annual salary and gross salary?
Annual salary is the total earnings of an employee over a year, on the other hand, gross salary is the total earnings before any deductions.