- What is Gross Salary?
- Components of Gross Salary
- What are the Other Benefits Provided by the Employer?
- What is the Difference between the Gross Salary and Net Salary?
- What are the Components of the Gross Salary as per Income Tax Act?
- Illustration on Gross Salary and Net Salary:
- What is the Meaning of Cost to Company CTC?
- How does Provident Fund Affect an Employee’s Gross Salary?
- What is the Taxability of the House Rent Allowance HRA?
- Frequently Asked Questions:
Gross salary is the sum of the total amount of compensation paid by the employer company to the employee as a part of the employer-employee relationship. Given the increase in salaried workforce, it becomes really important to understand the basics of gross salary. The CTC or cost to the company would be different from the take-home pay of the employee. Most salaried employees sometimes get confused between the terms gross salary and net salary. The gross salary is the total amount of employee CTC while the amount that the employee gets as take-home pay is the net salary. The gross salary does not exclude any deductions.
What is Gross Salary?
Whenever an employee joins any company, the company/ organization offers a salary for their services. From a company’s perspective, the salary paid to employees is the cost to the company, commonly known as the CTC. In simple terms, it is the amount that the company will have to incur for a specific financial year. This may or may not change in future years. It is important here to note that the cost to the company and the in-hand salary of the employee is different.
The components of gross salary include the following elements:
- Basic Salary
- House Rent Allowance
- Special Allowance
- Conveyance Allowance
- Medical Allowance
- Leave Travel Allowance
The following are a few other components that form part of the gross salary:
- Variable pay
- Cash rewards linked to performance
- Other allowances
- Salary arrears
- Meal coupons in the form of card or voucher
- Overtime payments
Components of Gross Salary
Let us discuss a few of the basic components of gross salary in detail:
Basic Salary: Basic salary can be defined as the salary which is paid to the employee without including any allowances or perquisites or making any deductions. In simple terms, the basic salary of an employee is not subjected to any deduction. The employee’s basic salary would always be lower than their take-home salary.
Perquisites: Prerequisites can be defined as the benefits which are provided to an employee by the employer in addition to the basic salary and other allowances. These can result from the position an employee holds within the organization. These benefits can either be monetary or non-monetary and can either be taxable or non-taxable.
House Rent Allowance: House rent allowance is provided by the employer in order to cover the cost of living of the employee. The intent of providing the house rent allowance to any employee is to ensure he/ she meets the rental cost on residential accommodation. It is one of the most important salary components which also offers tax benefits.
Salary Arrears: Salary arrears are payable to an employee in case of an increment in their salary. Your employer will pay you an arrear of salary in the case of an increase in your salary.
What are the Other Benefits Provided by the Employer?
The employer pays certain benefits to its employees as a part of the welfare of the employee. Moreover, such benefits do not form a part of the CTC Cost To Company of an employee. The following are a few examples of such benefits:
- Refreshments & snacks provided by the employer in the office premises during working hours.
- Reimbursement of the traveling and other expenses. These are the expenses that the employee pays from his/ her pocket as a part of the official travel.
What is the Difference between the Gross Salary and Net Salary?
When it comes to knowing your salary and its components, the most important aspect to know is what is the difference between gross salary and net salary. Your take-home salary is highly dependent on both the gross salary and net salary. The following table will help you understand the difference between gross salary and net salary.
|Gross Salary||Net Salary|
|Gross salary is the amount that is arrived at after adding all the benefits and allowances but before deduction of any tax.||Net salary means the take-home salary of the employee which is arrived at after deducting provident fund, insurance, etc.|
|It includes components like House Rent Allowance, Medical Allowance, Conveyance Allowance, etc.||Items deducted from the gross salary include Income Tax, Professional Tax, Pension, Provident Fund, etc.|
What are the Components of the Gross Salary as per Income Tax Act?
As per the provisions of section 17(1), salary includes the following:
- Any annuity or pension
- Any gratuity
- Fees, commissions, perquisites, or profits in lieu of or in addition to salary
- Any advance of salary
- Any payment received by an employee in respect of any period of leave not availed of by him
- the aggregate of all sums that are comprised in the transferred balance. Such sums are mentioned in sub-rule (2) of rule 11 of Part A of the Fourth Schedule. This is applicable to an employee who participates in a recognized provident fund. The amount of PF which is chargeable to tax under sub-rule (4) thereof; and
- the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in section 80CCD.
Illustration on Gross Salary and Net Salary:
Aditi is working as a Product Manager with a startup. Her gross salary per month is Rs. 1,00,000 comprising of the below components:
|House Rent Allowance||20,000|
|Leave Travel Allowance||10,000|
The following are the deductions available for Aditi’s salary:
Therefore, Aditi’s net salary would be Rs 1,00,000 – Rs14,000 = Rs. 86,000
What is the Meaning of Cost to Company CTC?
The cost to the company is the amount that the employer decides to pay the employee against his/ her services at the time of hiring. The breakup of the CTC includes house rent allowance, provident fund, medical insurance, and other allowance. These are added to the basic salary of the employee which then goes on to form the monthly and yearly salary of the employee. CTC includes direct and indirect benefits provided by the employer. This can include any sum payable by the employer on behalf of the employee, contribution benefits, etc.
How does Provident Fund Affect an Employee’s Gross Salary?
Employee’s Provident Fund or EPF is an employee benefits scheme. The scheme was recommended by the Ministry of Labour. It acts as a savings tool for the employee in the long run which they may use in an emergency. The scheme allows employees to contribute a part of their salary to the fund. The employer contributes an equivalent part to the employee’s provident funds. The Employee Provident Fund Organisation monitors and regulates the EPF scheme in India. The Employee Provident Fund Organisation has the authority to mandate the policies on the employer.
The amount that is received after deduction of the provident fund from the total cost to the company is the gross salary. An employee can withdraw the amount standing to the credit of his EPF account at the time of retirement or when the employee stains the age of 55. However, the amount can be withdrawn in the following cases as well:
- Termination of services
- In case the employee is migrating abroad
- Employee retiring due to permanent disability
What is the Taxability of the House Rent Allowance HRA?
In order to claim the exemption for house rent allowance HRA, the least of the below is exempt. However, the balance, if any, would be taxable in the hands of the employee:
- Rent paid in excess of 10% of salary
- 40% of salary. If the house is taken on rent is NOT situated in Kolkata, Chennai, Mumbai, and Delhi.
- 50% of salary. If house taken on rent is situated in Kolkata, Chennai, Mumbai, and Delhi
Frequently Asked Questions:
The various components of salary are bifurcated in form 16 under sections 17(1), 17(2), and 17(3). Section 17(1) contains components such as basic salary, house rent allowance, dearness allowance, leave travel allowance, etc. Section 17(2) provides for the perquisites payable to the employee such as rent-free accommodation. Further, Section 17(3) covers bonuses, commissions, etc. The employer issues Form 16 on or before the 31st May of the next year. The Form-16 is an important document which is helpful in preparing and filing your income tax return.
For the purpose of the income tax act, allowances can be classified into taxable, fully exempt, and partially exempt allowances. Allowances are provided by the employer as a benefit to the employee as a result of their position. This is provided over and above the salary of the employee. These allowances can be taxable or non-taxable depending on the nature of the benefit provided.
The arrears of salary are taxable in the hands of the employee. However, the employee can claim relief under section 89 to claim the benefit of lower tax for that particular year.
Leave encashment, when received by the employee during service is taxable. It is exempt in the hands of a government employee received at the time of retirement. In the case of a non-government employee, it is taxable as per the limits prescribed in the income tax act.