Major Comparison & Difference Between Gross & Net Salary

The differences between gross and net salary may seem perplexing to some. Hence, it is imperative for them to be well acquainted with the major differences between gross and net salary. While Gross Salary (GS) is obtained before deductions and by totalling all the benefits and allowances, Net Salary (NS) is an employee’s take home salary that is credited after deducting ESIC, EPF etc.

What is Gross Salary?

Gross salary is the amount given to employees without any deduction like medical insurance, income tax, PF etc. It is derived by subtracting Employee Provident Fund (EPF) and gratuity amount from the Cost to Company (CTC). 

Simply put, it is the total remuneration comprising bonuses, holiday pay, overtime pay and other benefits bestowed in favour of an employee. Gross salary is the total of net salary, taxes, PF contributions and allowances.

The formula that can be used to calculate gross salary is

Gross salary = Cost to company (CTC) – Employee Provident Fund (EPF) – gratuity 

To put it simply, Gross salary = Basic salary + HRA + Other Allowances

To get better clarity regarding the gross salary calculation, refer to the salary structure of Mr. X.

Basic SalaryRs. 30000
House rent allowanceRs. 9000
Transport allowanceRs. 1400
Provident fundRs. 2500
Income taxRs. 3000

His Gross salary will be – Rs. 30000 + Rs. 1400 + Rs. 9000 i.e is Rs. 40400. One must not include provident fund. Moreover, the amount will also remain unaffected by income tax.

What is Net Salary?

Net Salary, also known as take-home or in-hand salary, is a part of gross salary obtained after subtracting Tax Deducted at Source (TDS). It also does not include any amount added due to fringe benefits. It indicates the ultimate amount that an employee gets in their account.

Generally, net salary is lower than that of gross salary. However, in absence of income tax deductions, both gross and net salaries can be equal. 

NS can be easily computed by a simple formula, as given under.

NS = GS – Applicable deductions. 

For instance, Mr. X earns a gross salary of Rs. 40400. Amounts for deductions include components like: 

Employee Provident Fund (EPF)Rs. 2500
Professional taxRs. 2300
Insurance premiumRs. 4000

Now, Sum of all deductions is Rs. 8800

Net Salary per annum = Rs. 40400 – (Rs. 2500 + Rs. 2300 + Rs. 4000) = Rs. 31,600

What is the Difference Between Gross Salary and Net Salary?

There are several parameters based on which gross salary and net salary are differentiated. The table below highlights all such pointers. 

Point of ComparisonGross Salary Net Salary
AmountThe maximum amount that employees receive, before tax deductions. The amount that employees take home, after tax deductions.
Comparison GS is higher than that of an individual’s net salary. If the gross salary of an individual does not exceed the government tax slab limits, the net salary can be equivalent to the gross salary. 
BenefitsGS is the amount that is inclusive of several benefits like overtime pay, holiday pay, incentives etc. Net salary includes deductions on the gross salary.
Mode of CalculationGS is evaluated by adding all direct and indirect allowances. It is obtained from the CTC. NS is calculated by subtracting tax and other deductions from the gross salary. 
Formula to CalculateGS = Basic salary + HRA (House Rent Allowance) + CA (Conveyance Allowance) + Other allowancesNS = GS – applicable deductions. 

Components under Gross Salary Vs Net Salary

Here are the components based on which you can easily draw a comparison between gross and net salary.

Components of Gross Salary 

Working individuals must be aware of the following components of gross salary. 

  • Basic salary: It is the major component of GS which does not include bonuses, benefits, incentives etc. It is the fixed amount that employees receive directly from their workplace. 
  • House Rent Allowance (HRA): This part of the GS covers an employee’s housing rent expenses. 
  • Perquisites: Employees can also enjoy additional benefits besides basic salary and allowances. These prerequisites, like allowance for electricity, water, accommodation etc. are paid as emoluments. 
  • Employee contribution to Provident Fund (PF): Around 12% of an employee’s basic salary goes to Employment Provident Fund (EPF) every month.
  • Bonus and retirals: Even the bonus that is given to an employee falls under the employee’s gross salary. Superannuation, that is, the employee pension plan, is another component that falls under gross salary. 

Even pension component overtime payment, performance-related cash awards, medical allowance etc., also falls under the varied components of gross salary. 

Components of Net salary

Net salary is evaluated by combining basic salary and allowances and then deducting it from income tax, PF, etc. Hence, the take-home amount can be obtained by subtracting the following components from the gross salary:

  • Employee’s PF contribution
  • Income tax or TDS
  • State-specific professional tax

Besides knowing the components to be deducted, a working professional must know the factors which impact the calculation of NS. For example, NS depends on the country, company, company’s HR policies, designation of employee etc. 

Final Word

To summarize, salaried individuals must have a well-rounded idea regarding the various aspects of their salary and the differences between gross and net salary. Now as they know the distinction between the two, it will help them understand their salary breakup and avoid confusion while planning their finances. A clarity regarding the net salary will help employees take care of their travel costs, EMIs and other varied financial liabilities.

Frequently Asked Questions

What is Employee Provident Fund?

Employee Provident Fund (EPF) is a popular savings scheme rolled out by EPFO (Employees Provident Fund Organisation) to all salaried employees. In this employee-benefit scheme, employers are bestowed with facilities like insurance support, medical assistance, housing etc. A contribution of a minimum of 12% of an employee’s salary must be made towards his or her EPF by the employer.

What is the Cost To Company (CTC)?

CTC is provided by a company at the time of hiring. It is the amount that encompasses provident fund, medical allowance, HRA etc. It can also include other allowances like meal coupons, travel allowance, etc. All these parameters combine to form CTC. 

The basic formula for calculating the cost to company is: CTC= Gross salary + Benefits (Indirect + direct)

What are the components that are excluded from gross salary?

Salaried individuals must know about the following components that are excluded from the gross salary.

Reimbursement – medical expenses
Leave encashments 
Free meals or refreshments
Gratuity
Concessions offered on leave travels

Under which circumstances can employees withdraw money from their PF account?

Employees can withdraw accumulated amounts from their PF account under the following circumstances.

Service Termination
Migration for taking employment abroad
Retirement because of permanent disability

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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