The cost of the company is linked to the company, while on the other hand, an employee is worried about the amount of salary that he has to receive in his hands. If you are also facing this kind of problem, we are here to help you to solve it so that you can make an informed decision.

What is Gross Salary?

• Gross salary means the amount paid to you by the company before employee provident fund, gratuity and other deductions and contribution to income tax.
• Employees Provident Fund is a scheme provided for the benefit of retirees. In which the employee and the company contribute at least 12% of the total salary and dearness allowance every month. You can withdraw the full amount when you retire.
• Gratuity is the amount paid by the company at the time of your retirement for the services you have rendered during your employment period. If you have completed 5 years of continuous service in any company, then you are given gratuity.
• However, in many cases, companies pay the gratuity amount even if the employee has not completed 5 years of service in the company. Such as in cases where the employee dies before completing 5 years of service or becomes disabled.

What is included in the gross salary?

Below is a brief description of all the benefits that are part of the gross salary, for your better understanding.

1. Basic Salary: The basic salary is the amount before adding other payments made to the employee, such as bonus, allowances, etc., and before deducting any contribution or tax.

2. House Rent Allowance- This is the amount paid to the employee for the reimbursement of house rent for moving from his place of residence as part of his employment. The house rent allowance is exempted from income tax. The HRA amount exempted from income tax is calculated in the basic salary.

3. Leave-Traveling Allowance: This is the allowance given to the employee by the company for traveling expenses incurred during domestic travel on leave. LTA is payable only for 2 journeys in a block of 4 years only. This includes travel expenses like bus fare and train tickets. LTA is also a part of the gross salary received by the employee.

4. Telephone or Mobile Phone Allowance: A portion of the gross salary paid to an employee to cover mobile or telephone expenses.

5. Conveyance Allowance: This is given to employees in addition to their basic salary as compensation for travel expenses, due to which they can commute to and from the place of work.

6. Special/Other Allowances- The company may pay other allowances to the employee to meet certain expenses, which are not covered under other allowances. They are included in Special/Other Allowance.

7. Perks- Perks are benefits given to employees at concessional rates or free. Which is a part of gross salary.

What is a net salary?

After knowing about Gross Salary, now let’s understand ‘Net Salary’

• Net salary is the part of your salary that you get in cash. Net salary is calculated by deducting the contribution towards the pension fund, provident fund, gratuity, and other statutory taxes and income tax amount from the gross salary.
• Net Salary is also known as Take salary. Which is what you get after all the deductions. It is important to discuss the take-home salary before agreeing to get employment so that no problem arises in the future. As you will be able to understand whether the job income and savings will meet your goals or not.

What does Cost to Company (CTC) mean?

CTC means the total amount of expenditure incurred by the company on the employee in a year. It is the expenditure incurred by the company on its valuable assets i.e. employees. A significant portion of the money any company has is spent on hiring and retaining skilled, qualified and competent employees. A company must offer excellent salaries to attract new employees to join your company.

• As employees devote their abilities, skills and valuable time to the work of the company, they expect to be paid a fair salary for their work. Employees invest more of their time in the work of the company to grow the company, so they hope that the company will also take care of them in the future after their retirement.
• For this reason, the company also contributes to the employee’s provident fund, pension fund,, and gratuity. Allocations made to these post-retirement benefit plans are also included in the company’s expenses.
• It is the responsibility of the company to ensure the safety and good health of employees and their families. Health insurance, life insurance, reimbursement of medical expenses and other benefits are also provided to the employees, these benefits are also part of the company’s expenses.
• Company expenses also include amounts such as bonuses or commissions paid to employees based on annual performance. Variable pay is calculated from a certain percentage of the employee’s basic salary.
• In-hand salary is always less than the gross salary mentioned in the offer letter. This is because some expenses are incurred indirectly by the company rather than directly passed on to the employee. Although these types of expenses are not included in the salary check, they benefit the employees.
• The cost of the company and its expenses vary from company to company. For example, a banking company provides loans to its employees at concessional rates. Some other companies offer coupons for lunch. Thus, this cost of the company is also the total cost in terms of the company. It also includes the amount of the employee’s salary, compensation, allowance, gratuity, post-retirement benefits, insurance, or other expenses.

Let us understand, through an example, how Gross Salary, Net Salary and Company Expenses are calculated.

Mr. A works in a private company, and he gets $6,00,00 per year as a gross salary. And his take-home salary is 5,34,000. The components of his salary are as follows

Based on the above-mentioned details :-

• Gross salary is calculated by adding basic pay, house rent allowance, leave travel allowance, and special allowance to Rs 6,00,000.
• Calculate the net salary by deducting the amount of provident fund, gratuity, insurance premium, and business tax from the gross salary. So the net salary will be 5,34,000 rupees.
• Company expenses incurred in this example are sum of all benefits, including provident fund and gratuity paid to employee and deduction of insurance premium in a year. So the CTC is Rs 6,63,500.
• Professional taxes deducted from the employee’s gross salary are not part of the company’s expenses. This is not because it is an employee payment. The company does not reimburse or contribute to the employee for payment of business tax.
• It is a very common practice that companies also mention the expenses incurred by the company in the offer letter as the amount paid to the employee. which is related to company expenses, when an employee wants to know his take-home salary. Sometimes employees misunderstand this amount as a net take-home salary and accept the offer.
• That is why it is important to have basic knowledge of these terms before entering into any salary discussions. You have learned the difference between CTC and gross salary and also learned how to calculate gross salary from CTC. Now you can calculate your take-home salary before accepting the offer letter. Clarifying your salary changes and other elements with the company is always advisable. By knowing about the different parts of your salary, you can make well-informed decisions about future investments and post-retirement planning.

Frequently Asked Questions (FAQ)

Can I calculate gross salary online?

Many websites offer online gross salary calculators to easily calculate your gross salary and net salary. where you only have to enter some basic details, such as company expenses and bonuses.

Are business tax and income tax also part of the CTC?

No, business tax and income tax are paid separately by the employee, and not by the company. So it is not considered an expense of the company.

What is the standard of deduction in salary as per income tax rules?

For the financial year 2020–21, a standard deduction of $50,000 is deducted from the gross salary of all salaried employees as per income tax rules. However, you cannot avail of this deduction. If the income tax is calculated based on the new tax slab rates, which provides for a lower tax rate,.

Tax is deducted from which source of salary income?

Tax Deduction at Source (TDS) is calculated on the amount of net salary. Net salary is calculated by deducting all income taxes from gross salary, excluding business taxes. TDS is deducted based on the income determined for the financial year and the tax thereon.

Do I need to calculate my gross salary, net salary, and taxes paid by me for filing my income tax return?

Companies issue Form 16 with all salaries paid to their employees for the financial year and tax deducted at the source of salary, so you don’t need to worry about calculations for filing an income tax return. However,, you can recalculate your salary for your information as per the details given in Form 16.

What is the difference between compensation and fringe benefits?

Compensation (allowance) is an amount paid by a company to an employee to enable them to perform their job-related activities better. Which is the payment made to the employee every month. For example vehicle allowance and house rent allowance etc. On the other hand, fringe benefits are non-monetary benefits provided by the company to the employee. For example, free accommodation facility, car facility for commuting to the company, etc.