For every individual, a successful career is often correlated with having a high income from salary. A large number of people join the workforce in different industries every day, which has made the total number of salaried individuals in India reach 77.1 million (by Dec 2021).
The excitement and fervor that comes with becoming a salaried employee are inexplicable for many. However, there is a common surprise that every employee faces on receiving the first salary – the difference between the total CTC (Cost to Company) and the in-hand salary. For many beginners, it is quite difficult to understand the subtle differences between gross salary, take-home pay, and cost to company.
Here, we will cover gross salary in detail and how it is calculated based on other salary components.
What is gross salary?
Gross salary refers to the total of all the components of an employee’s salary before any voluntary or mandatory deductions (Provident Fund, health insurance, etc.). It includes income from all sources and is not limited to the income received in cash only.
As an employer, you need to provide a breakup of all the components that makes up the gross salary in the monthly payslip given to your employees. Gross salary meaning is often misinterpreted as the salary that an employee takes home (net salary).
Components of Gross Salary
The following table defines different components of gross salary:
| Component | Description |
| Basic Salary | Amount paid to an employee excluding bonuses, perks, and incentives |
| House Rent Allowance (HRA) | Amount paid towards covering the accommodation expenses of an employee (applicable to both salaried and self-employed individuals) |
| Provident Fund (PF) – Employee Share | Amount deducted from the employee’s salary towards the Employment Provident Fund (12% of the basic salary) |
| Special Arrears or Salary Arrears | An additional sum accrued from a salary hike or increment |
| Special Allowance | Additional benefits offered by your organization that covers transport, conveyance, outstation visits, etc. |
| Perquisites | Benefits over and above the basic salary (taxable or non-taxable depending on their nature |
Components that are excluded from gross salary
- Travel leave concession
- Gratuity
- Reimbursement of medical expenses
- Free meals
- Leave encashment
How to calculate gross salary
As stated above, gross salary includes basic salary and different allowances before any deduction of taxes, PF, or TDS. You can use the simple gross salary formula to learn how to calculate gross salary:
Gross Salary = Basic Salary + HRA + All Other Allowances
Difference between gross salary and basic salary
There are a few differences between gross salary and basic salary that are mainly based on deductions or special allowances.
| Gross Salary | Basic Salary |
| It refers to the salary paid to an employee (either monthly or annually) without any tax deductions. | It is the salary component paid to employees before adding any benefits in the form of perquisites or allowances. |
| It includes bonuses, allowances, overtime pay, and other perks. | It also covers the core amount received by employees and forms the basis for calculating HRA and PF deductions. |
Difference between gross salary and net salary
Use the following table to understand how to calculate gross salary from net salary:
| Gross Salary | Net Salary |
| Total amount payable to the employee after adding different benefits and allowances (but before deducting taxes) | Amount that an employee takes home every month |
| It includes benefits like HRA, medical insurance, etc. | It is obtained by subtracting all the deductions from the gross salary. |
Example of gross salary and net salary
Mr. Bedi works in a digital marketing firm and has an annual gross salary of Rs. 6,20,000. After all the deductions, his net salary turns out to be Rs. 5,93,000. The following table illustrates all the deductions that clarify the difference between his net salary and gross salary:
| Basic salary component | Rs. 3,00,000 |
| HRA | Rs. 1,20,000 |
| Leave and travel allowance | Rs. 60,000 |
| Special allowance | Rs. 1,40,000 |
| Total | = Annual gross salary |
| Deductions | |
| PF | Rs. 21,600 |
| Professional tax | Rs. 2,400 |
| Insurance cost | Rs. 3,000 |
| Total Deductions | Rs. 27,000 |
| Net Salary | Rs. 6,40,000 – Rs. 27,000 = Rs. 5,93,000 |
FAQs
What is CTC?
CTC refers to the cost incurred by a company to hire an employee.
How is gross salary calculated?
It is calculated by adding the basic salary of an employee to the allowances prior to making any deductions.
Is monthly income a gross salary or net salary?
Net monthly income is the one left after the taxes and other deductions. But the amount that an employee receives every month before covering these deductions is the gross salary.
Is PF based on gross salary?
In most cases, the PF contribution is calculated based on the basic salary component.
