The income receives by an employee after subtracting gratuity and employee provident fund (EPF) from Cost of the Company (CTC) is known as gross salary. In other words, it is the total income that an employee receives before tax and other deductions.
The aggregate amount of compensation paid by an employer or company to the employee towards his/her employment is the gross salary. Although this aggregate amount is Cost to The Company or CTC to the employee.
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Components of Gross Salary
Direct benefits:
- Basic salary
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Telephone or mobile phone allowance
- Vehicle allowance
- Special allowances
Indirect benefits:
- Performance linked incentives or bonus
- Overtime payments
- Accommodation provided by the employer
- Electricity bills and water bills
- Meal coupons
The components of gross salary include numerous benefits which are discuss below:
- Basic Salary:
It is the fixed sum of money paid to an employee by an employer. It does not include any other bonus, incentives, benefits, or any other perk.
- House Rent Allowance or HRA:
It is also the component of salary that covers the housing expense of an employee.
- Provident Fund (PF):
12% of the basic salary will contribute towards Employee Provident Fund (EPF) by both employees as well as the employer.
- Perquisites:
Perquisites can be offered in the form of both monetary as well as non-monetary benefits. These are the benefits which are offered to employees apart from the basic salary and specific allowances.
- Special allowances:
These are additional allowances such as transport allowance, conveyance allowance, traveling allowance paid to the employee after the basic salary.
- Bonus:
Bonus is paid to the employee based on personal performance to boost up their morale.
- Professional Tax:
The tax is the charge on the gross salary of an individual by the state government. These charges may tax up to Rs 2500 in a financial year.
Other benefits provided by an employer:
There are certain expenses, which an employer incurs for the employees as welfare in the organization. These expenses will not include in the Cost of The Company (CTC) of an employee. Examples of such components are:
- Snacks, beverages, and other refreshments are provided by the employer during office timings.
- Reimbursement of expenses incurred by the employee on travel and food during official/business tours.
How to compute gross salary?
Gross salary is computed by adding the basic salary of an employee and certain allowances before making the deduction. Hence, the basic salary is the base or fixed income of an employee apart from other additional benefits. To calculate gross salary below mention formula is as follow:
Gross Salary = Basic Salary + House Rent Allowances + Other Allowances
Illustration:
| Basic salary | Rs 2,00,000 |
| House rent allowance | Rs 1,20,000 |
| Leave and travel allowance | Rs 50,000 |
| Special allowance | Rs 60,000 |
| Total (A) | Rs 4,30,000 |
| Deductions: | |
| Provident fund | Rs 15,000 |
| Profession tax | Rs 2,400 |
| Insurance premium | Rs 3,000 |
| Total Deductions (B) | Rs 20,400 |
| Net salary per annum (A)-(B) | Rs 4,09,600 |
Difference between Gross Salary and Basic Salary
| Gross Salary | Basic Salary |
| It is the salary paid to an employee which includes certain allowances but excludes tax deductions. | It is the salary paid to an employee before any extra benefits. |
| Gross salary includes bonuses, overtime pay, house rent allowances, travel allowances, and other differentials. | Basic salary is the core or fixed salary received by an employee during his/her employment. |
Difference between Gross Salary and Net Salary
| Gross Salary | Net Salary |
| Gross salary is the amount received by an employee which includes certain allowances but excludes tax charges. | Net salary is the amount that an individual receives after all deductions (tax charges) have been taken out. |
| Gross salary = Basic salary + House Rent Allowances (HRA) + Other allowances | Net salary = Gross salary – Income tax – Provident Fund – Professional tax |
Reporting Salary on Taxes
As per the Income Tax Act, 1961, there are two types of taxes in India:
- Direct Tax: It is borne and paid directly only by a taxpayer to the government. For instance wealth tax, gift tax, income tax, property tax, or corporate tax, etc, are the direct types of tax.
- Indirect Tax: This tax is payable to the government through an intermediary. In this, the tax burden is levied on another person by an individual.
On February 1st, 2021, the Finance Minister of India announced a new income tax rate. However, this new regime is optional to the individual and co-exists with the previous income tax slab.
An individual can use any tax slab as per his/her wish. Salaried employees can, therefore, opt for the new slab or pay according to the previous slab also.
Income tax rates and slabs for FY 2020-21
| Income Tax Slab | Tax Rate |
| Up to Rs.2.5 lakh | Nil |
| Above Rs.2.50 – Rs.5 lakh | 5% |
| Above Rs.5 lakh – Rs.7.50 lakh | 10% |
| Above Rs.7.50 lakh – Rs.10 lakh | 15% |
| Above Rs.10 lakh – Rs.12.50 lakh | 20% |
| Above Rs.12.50 – Rs.15 lakh | 25% |
| Above Rs.15 lakh | 30% |
Sections 80C and 80D both are the most used options by salaried individuals for saving income tax. Individuals who invest in tax-saving instruments can claim up to Rs. 1,50,000 for tax deductions from their annual income. Although, it provides them various benefits and saves their hard earn money.
Some of these tax-saving tools used by an individual under Section 80C are as:
- Life insurance premium
- Employee Provident Fund (PF)
- Public Provident Funs
- Annuity or Pension schemes
- Fixed deposits
- Children’s Tuition fee
- National Saving Certificate (NSC)
- Equity Linked Savings Scheme (ELSS)
Whereas, Section 80D provides an opportunity to taxpayers to claim deductions on medical expenses. A salaried person is eligible to save tax on medical charges paid for self, dependents, or family.
Cost To Company – CTC
Cost to Company is the cost a company incurs while hiring an employee. It involves some other elements such as House Rent Allowance (HRA), Provident Fund (PF), Medical Insurance, Bonus, among other allowances.
These allowances may also include a free meal, electricity charges, water bills, office cab services, etc. Moreover, all the elements combine together to form Cost To Company. CTC is the company spending on hiring and sustaining employees for a long time, although it reduces the employee turnover rate.
In addition, CTC is a variable pay as it varies from employee to employee based on certain factors. An increase or decrease in the basic salary affects the CTC of the employee. In simple words, Cost to Company is the cost incurred by an employer and income to the employee.
CTC = Direct Benefits + Indirect Benefits + Savings
CTC is the total of Direct Benefits (basic salary paid to an employee every year), Indirect Benefits (sum the employer pays on the behalf of the employee), and Saving Contribution (in the form of the provident fund).
Conclusion
To conclude, gross salary is the most crucial term. Whether you are an individual or business owner, it is necessary to be aware of gross salary.
Gross salary is a combined term of several benefits offered by the employer to employees and tax deductions. For instance, it includes basic salary, house rent allowance, travel allowance, bonus, medical insurance, etc. In addition, the net salary is the segment of gross salary compute after reducing income tax and other deductions.
Frequently Asked Questions
Gross salary is the aggregate amount received by an employee before any deduction. It is computed by using the formula: Gross Salary = Basic Salary + HRA + Other Allowances
Gross salary is the monthly or yearly salary of an individual without any deduction. It includes basic salary, house rent allowances, bonus, travel allowance, medical allowance, and other related benefits.
Usually, the basic salary is 40% to 60% of the Cost to the Company (CTC). The other components such as bonus, provident fund, gratuity are determined based on the basic salary.
An increase or decrease in the basic salary can affect the employee CTC and cost incurred by the company also.
Basic salary is the fixed or basic amount to be paid to an employee by the employer towards his/her employment. Additional benefits such as bonuses, overtime, allowances are not the part of basic salary. Usually, the basic salary will depend upon the individual performance.
Gross Salary is the amount paid to an employee after adding all the benefits and allowances and before deducting any tax. Whereas, Net Salary is the amount of money of an employee after all the deductions.
Cost To Company or CTC is commonly a cost of a company which it incurs while hiring an employee. It involves a number of other elements such as house rent allowances, provident funds, or medical insurance, etc.
