Salary, Net Salary, Gross Salary, Cost to Company are they same or different. For most people it is plain confusion especially when one gets a new job. The excitement of getting first job is punctured on getting the first pay. It is usually less than what the fresher employee expected. Usually in the campus interviews company advertise their Cost to Company (or CTC) and people mistake their salary to be based on that (CTC/12). Educated but have No Financial Education is about the confusions of a new employee. In this article we shall try to cover what makes the salary? What is the difference between Salary, Net Salary, Gross Salary, Cost to Company .
How people earn money?
The three broad ways in which people earn money are as follows:
- Working for someone else or Employee ,
- Working for themselves or Self Employed ,
- and running a business.
When a person works for someone else or company, (s)he is then said to hold a job and is calledEmployee . The person or the company he or she works for is called Employer. Money that is paid is called as Salary or Income or Wage.
The three broad ways in which people earn money are as follows:
- Working for someone else or Employee ,
- Working for themselves or Self Employed ,
- and running a business.
When a person works for someone else or company, (s)he is then said to hold a job and is calledEmployee . The person or the company he or she works for is called Employer. Money that is paid is called as Salary or Income or Wage.
Salary
As explained earlier Money that is received under Employer-Employee relationship is called as Salary. If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such case your income would be treated as income from business and profession).
Did you know that word salary has come from Latin salrium based on salrius which means pertaining to salt. The word appeared in 1350-1400. In those days, salt , regular ordinary table salt, was a prized and valuable commodity. It was money given to Roman soldiers to buy salt. The phrases the salt of the earthor worth your salt refer to the high value of salt.
The salary consists of following parts.
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure.It is a fixed part of one’s compensation structure.
Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Children’s Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or non taxable. One can read Understanding the components of your salary and their taxation for more details.
Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such asRent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.
How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.
As explained earlier Money that is received under Employer-Employee relationship is called as Salary. If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such case your income would be treated as income from business and profession).
Did you know that word salary has come from Latin salrium based on salrius which means pertaining to salt. The word appeared in 1350-1400. In those days, salt , regular ordinary table salt, was a prized and valuable commodity. It was money given to Roman soldiers to buy salt. The phrases the salt of the earthor worth your salt refer to the high value of salt.
The salary consists of following parts.
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure.It is a fixed part of one’s compensation structure.
Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Children’s Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or non taxable. One can read Understanding the components of your salary and their taxation for more details.
Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such asRent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.
How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.
Deductions: Two type of deduction are made from salary
- Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) .
- Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc
- Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) .
- Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc
Provident Fund Contribution
Provident fund contribution has two sides – the employer’s contribution and employee’s contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund(PF) account and paid to employee when he retires or resigns.There is also employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)
Provident fund contribution has two sides – the employer’s contribution and employee’s contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund(PF) account and paid to employee when he retires or resigns.There is also employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)
Different types of salary
Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Example
Let’s see an example explaining the salary. An arbitrary salary break up is given below (Note: salary structure varies from one company to another):
Component of Salary(per annum or p.a) Amount Basic Salary 480,000 Dearness Allowance 48,000 House Rent Allowance 96,000 Conveyance Allowance 12,000 Entertainment Allowance 12,000 Overtime Allowance 12,000 Medical Reimbursements 15,000 Gross Salary 6,75,000
Benefits vary from company to company. Example of benefits for the above employee are:
Medical insurance 2000 Provident Fund (12% of Basic) 57,600 (12% of 4,80,000) Laptop 50,000 Total Benefits 109600 Cost to Company=Gross Salary + Benefits 6,75,000 + 109600=7,84,600
Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to company. One can read Cost To Company or CTC salary: Understanding and Calculation for more details.
How tax affect the various components of salary
Component of Salary(per annum or p.a) Amount Tax Taxable Amount Basic Salary 480,000 Full amount is taxable 480,000 Dearness Allowance 48,000 Depends on company policy. Mostly fully taxable. 48,000 House Rent Allowance 96,000 Applicable if living in a rented house. Minimum of three amounts (Note:Calculation shown below) 52,800 Conveyance Allowance 12,000 Conveyance allowance of Rs 9,600 per annum is exempted from tax. If salary component is more than 9,600, the remaining part is taxable.In this case:12,000-9600=2400 2,400 Entertainment Allowance 12,000 Depends on company policy. Mostly fully taxable. 12,000 Overtime Allowance 12,000 Fully taxable 12,000 Medical Reimbursements 15,000 If substantiated with bills, are exempt to a limit of Rs 15,000 annually 0 Gross Salary 6,75,000 Gross Taxable Salary 6,07,200
HRA Calculation
The minimum of the three amounts will be exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 – 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)
So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.
So the portion that will be taxed in this example is = 96,000 – 43,200 = 52,800
Tax
As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103. For tax estimator Calculator of InvestmentYogi is very helpful.
Tax 57,103 Employee PF contribution(12% of Basic) 57,600 Professional Tax 2400 Total Deductions 1,17,103 Net Salary = Gross Taxable Salary – Tax =6,07,200- 1,17,103=4,90,097 Net Monthly Salary =490097/12=40,841.41
| Component of Salary(per annum or p.a) | Amount |
| Basic Salary | 480,000 |
| Dearness Allowance | 48,000 |
| House Rent Allowance | 96,000 |
| Conveyance Allowance | 12,000 |
| Entertainment Allowance | 12,000 |
| Overtime Allowance | 12,000 |
| Medical Reimbursements | 15,000 |
| Gross Salary | 6,75,000 |
Benefits vary from company to company. Example of benefits for the above employee are:
| Medical insurance | 2000 |
| Provident Fund (12% of Basic) | 57,600 (12% of 4,80,000) |
| Laptop | 50,000 |
| Total Benefits | 109600 |
| Cost to Company=Gross Salary + Benefits | 6,75,000 + 109600=7,84,600 |
Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to company. One can read Cost To Company or CTC salary: Understanding and Calculation for more details.
How tax affect the various components of salary
| Component of Salary(per annum or p.a) | Amount | Tax | Taxable Amount |
| Basic Salary | 480,000 | Full amount is taxable | 480,000 |
| Dearness Allowance | 48,000 | Depends on company policy. Mostly fully taxable. | 48,000 |
| House Rent Allowance | 96,000 | Applicable if living in a rented house. Minimum of three amounts (Note:Calculation shown below) | 52,800 |
| Conveyance Allowance | 12,000 | Conveyance allowance of Rs 9,600 per annum is exempted from tax. If salary component is more than 9,600, the remaining part is taxable.In this case:12,000-9600=2400 | 2,400 |
| Entertainment Allowance | 12,000 | Depends on company policy. Mostly fully taxable. | 12,000 |
| Overtime Allowance | 12,000 | Fully taxable | 12,000 |
| Medical Reimbursements | 15,000 | If substantiated with bills, are exempt to a limit of Rs 15,000 annually | 0 |
| Gross Salary | 6,75,000 | Gross Taxable Salary | 6,07,200 |
HRA Calculation
The minimum of the three amounts will be exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 – 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)
So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.
So the portion that will be taxed in this example is = 96,000 – 43,200 = 52,800
The minimum of the three amounts will be exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 – 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)
So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.
So the portion that will be taxed in this example is = 96,000 – 43,200 = 52,800
Tax
As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103. For tax estimator Calculator of InvestmentYogi is very helpful.
As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103. For tax estimator Calculator of InvestmentYogi is very helpful.
| Tax | 57,103 |
| Employee PF contribution(12% of Basic) | 57,600 |
| Professional Tax | 2400 |
| Total Deductions | 1,17,103 |
| Net Salary = Gross Taxable Salary – Tax | =6,07,200- 1,17,103=4,90,097 |
| Net Monthly Salary | =490097/12=40,841.41 |
Can Take Home salary be increased?
Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed on 6,07,200- 1,00,00 = 5,07,200.
Amount to be taxed 5,07,200 Tax 33,413 Employee PF contribution(12% of Basic) 57,600 Professional Tax 2400 Total Deductions 93,413 Net Salary = Gross Taxable Salary – Tax =6,07,200- 93,413=5,13,787 Net Monthly Salary =513787/12=42,815.58
Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in thisinfographic. Optimum Salary Structure – Maximum In Hand Salary Or Minimum Tax Liability explains how restructuring the salary would increase the take home
Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed on 6,07,200- 1,00,00 = 5,07,200.
| Amount to be taxed | 5,07,200 |
| Tax | 33,413 |
| Employee PF contribution(12% of Basic) | 57,600 |
| Professional Tax | 2400 |
| Total Deductions | 93,413 |
| Net Salary = Gross Taxable Salary – Tax | =6,07,200- 93,413=5,13,787 |
| Net Monthly Salary | =513787/12=42,815.58 |
PaySlip
A paycheck is a document/record issued by an employer to an employee which shows how much money an employee have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions taken out of the gross amount to arrive at the final net amount of the pay. One can read format of payslip or see a sample here.
A paycheck is a document/record issued by an employer to an employee which shows how much money an employee have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions taken out of the gross amount to arrive at the final net amount of the pay. One can read format of payslip or see a sample here.
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