4 Mins

Meaning of Gross Income

In the case of an individual, gross earnings refer to the total income earned before any tax adjustments or deductions. In this case, suppose Ramesh has a total income of Rs. 5,00,000 from which he paid Rs. 1,00,000 towards LIC. His gross earnings in this case would be Rs. 5,00,000 and net earnings would be Rs. 4,00,000.

While in the case of business, gross earnings refer to the revenue left after reducing the cost of goods sold. A company ABC Limited was in the business of selling shampoo and their total revenue was Rs. 2,00,000 and its cost of goods sold is Rs. 1,00,000. In this case, their gross earnings will be Rs. 2,00,000 and net earnings would be Rs. 1,00,000.

What is the difference between gross income and net income?

In simple terms, gross income is the total amount that a person earns before reducing any of the liabilities. The net income is arrived at after reducing the liabilities from the gross income. In business terms, whatever a person earns is his gross income, and the net income would be the actual business profits arrived at after reducing the expenses.

When you are running a business, gross income is considered as the total amount that you earn before reducing any of the expenses done to earn that income. To arrive at the net income, expenses are to be reduced from the gross income.

For a salaried employee, gross income or gross salary is the amount paid before any deductions of taxes, provident fund, etc. In order to arrive at the net income, deductions are to be made from the gross income.

What is the formula for gross income?

In the case of an individual, gross income is calculated as the total income before any deductions and taxes. For a salaried employee, it is calculated as annual salary/12. 

In the case of a person carrying on any business, the gross income is calculated as the revenue which is earned from the sale of goods or rendering of services – the cost of goods sold(excluding the applicable taxes).

Let us understand the same with the help of an example:

A company XYZ Limited was in the business of selling fans and their total revenue was Rs. 10,00,000. Below are the costs incurred by the company:

  1. Raw materials purchased: Rs. 5,00,000
  2. Labour charges Rs. 2,50,000
  3. Packing charges: Rs. 2,00,000

The cost of goods sold will be calculated as below:

COGS = 5,00,000+2,50,000+2,00,000 = 9,50,000

Gross income = gross revenue – the cost of goods sold

                        = 10,00,000 – 9,50,000 = Rs. 50,000 

Does gross income include taxes?

It is the total amount that a person earns before reducing any of the liabilities. The net income is arrived at after reducing the liabilities from the gross income. In business terms, whatever a person earns is his gross income, and the net income would be the actual business profits arrived at after reducing the expenses.

From the gross income, deductions are subtracted in order to arrive at the net income on which the individual is taxed. Let us understand the same with the help of an example:

Suppose Hari is an individual earning a salary of Rs. 10,00,000. He had made an investment towards PPF amounting to Rs. 1,50,000 during the financial year. While Hari’s gross income is Rs. 10,00,000, his net income will be Rs. 8,50,000(10,00,000 – 1,50,000) on which Hari will be taxed at the applicable rates in force.

What do gross earnings mean?

In the case of an individual, gross earnings refer to the total income earned before any tax adjustments or deductions. In this case, suppose Ramesh has a total income of Rs. 5,00,000 from which he paid Rs. 1,00,000 towards LIC. His gross earnings in this case would be Rs. 5,00,000 and net earnings would be Rs. 4,00,000.

In the case of business, gross earnings refer to the revenue left after reducing the cost of goods sold. A company ABC Limited was in the business of selling shampoo and their total revenue was Rs. 2,00,000 and its cost of goods sold is Rs. 1,00,000. In this case, their gross earnings will be Rs. 2,00,000 and net earnings would be Rs. 1,00,000.

What is deducted from gross pay?

There are some deductions that are made from the gross pay as per the applicable law and some deductions are allowed on a voluntary basis. In the case of salaried employees, deductions under section 80C, 80D, house rent allowance, EMI on home loan, etc. are reduced to arrive at the net income on which tax is calculated.Gross Income