In simpler terms, Gross Salary is the amount which is given to the employee, including festive and annual bonus, leave encashments, etc., before the deduction of any kind of tax, whatsoever. Continue reading to learn more about it.
There are two important terminologies that are required to get a basic idea of what a Gross Salary is, they are Cost to Company [CTC] and Employee’s Provident Fund [EPF]. Cost to Company or CTC, as it is often called, is the cost incurred by the company while hiring an employee. It constitutes a number of elements like House Rent Allowance, Provident Fund, Dearness Allowance, Medical Insurance, etc. These are generally the allowances which are incurred by the company and added to the basic salary of an employee.
Employee Provident Fund or EPF, as it is called in common parlance, is a social security scheme for the benefit of employees. These facilities range from medical assistance, retirement, education for children, insurance support, housing, conveyance reimbursement, etc. As per the directions of the Employee Provident Fund Organisation [EPFO], every employee is required to contribute at least 12% of the employee’s salary towards their EPF account. The EPF scheme is prescribed by the Ministry of Labour. Therefore, with the concepts of CTC and EPF, Gross salary is arrived at when the EPF and gratuity are subtracted from the CTC.
Note: Gratuity is an honorarium token amount that is paid to the employer for the services offered during the employment tenure. It is also a benefit plan which matures and is handed over to the employer at the time of his or her retirement.
What constitutes Gross Salary?
The basic components of gross salary are as follows:
- Direct Benefits: Direct Benefits include basic salary, house rent allowance, leave travel allowance, telephone and mobile phone bill allowance, conveyance allowance and all other special allowances if any.
- Indirect Benefits: Indirect Benefits are those which occur outside routine, i.e., incentives or bonus, overtime payment, housing provisions by the employer, bearing of utility bills by the employer, arrears of salary, etc.
Therefore, both direct, as well as indirect benefits accounted for together, constitute the gross salary of an employee. Apart from the above two components, there are also other benefits provided by an employer, generally made towards the welfare of the employees of any given organisation. These expenses are such in nature that they aren’t included in the CTC of an employee. For example;
- Food and drinks refreshments provided to the employee during office hours. This covers snacks and beverages like tea and coffee and other refreshments provided.
- Reimbursement of expenses incurred by the employee on travelling due to an official visit or tour, expenses incurred against lunch and dinner, etc.
How to calculate gross salary and net salary? What is the difference?
In order to understand the difference between gross salary and net salary and their calculation, follow the calculation given below. This is best understood with the help of an example. Therefore, let us assume that Mathew works at a Human Rights organisation in New Delhi. His gross salary per annum is ₹ 8,50,000 while his net take-home is just ₹ 8,11,000. The break-up of his salary is given as under:
|Basic salary||₹ 4,50,000|
|House rent allowance||₹ 1,70,000|
|Leave and travel allowance||₹ 50,000|
|Special allowance||₹ 1,80,000|
The amount arrived at before making any deductions is known as the Net Salary. From the total amount arrived at which is the Net Salary, the following deductions are to be made:
|Provident fund||₹ 2,600|
|Profession tax||₹ 2,400|
|Insurance premium||₹ 10,600|
|Total Deductions||₹ 15,600|
Now in order to arrive at the gross salary, the formulas are simple. The calculation to be followed is the net salary less deductions. Therefore, here the net salary is ₹ 8,50,000/- from which ₹ 39,000/- is to be deducted. The amount arrived at (i.e.,₹ 8,11,000/- ) is the gross salary
|Net salary per annum||Gross salary – deductions|
|₹ 8,50,000||₹ 8,50,000 – ₹ 39,000 = ₹ 8,34,400/-|
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