What Is Gross Salary? Know How To Calculate Gross Salary Or CTC

Newly recruited employees and people who are new to the corporate world often complain that they receive a substantially less amount of salary in hand as compared to what was promised to them. This is because of the difference between the three terms Gross Salary, Net Salary and Cost to Company, which appears to be the same but have different meanings. 

The cost to the company is relevant for the company. In contrast, an employee is concerned with the amount of salary he will get in hand. If you are also facing such an issue, then we help clarify your doubts regarding this so that you can make a well-informed decision.

What is the Gross Salary?

• Gross salary means the amount paid to you by your employer before subtracting the contribution made for employee provident fund, gratuity and other deductions and income tax. 
  • Employee provident fund is the retirement benefits scheme. The employee and the employer contribute at least 12% of the basic salary and dearness allowance every month. At the time of your retirement, you’ll be able to withdraw the whole amount. 
  • Gratuity is the amount your employer pays at the time of retirement for the services you had rendered during your employment. Gratuity is paid if you have provided continuous service of at least five years to the business. 
  • However, in certain situations, employers pay gratuity even if the employee does not complete five years of service, such as death or disability of the employee before the completion of five years of service.

Also Read: What Is A Salary Slip? Why Is It Important? What Is Its Format?

What Does Gross Salary Include?

A brief explanation about the direct benefits which form the part of gross salary is given as under for your better understanding:

1. Basic Salary – Basic salary is the amount before adding any other payments made to the employee, such as bonuses, allowances, etc. and before deducting any fixed contributions or taxes.
2. House Rent Allowance – It is paid to the employee for compensation of house rent incurred by him for staying at a place other than his place of residence for employment. House rent allowance is partially exempt from taxation. The amount of HRA exempt from tax is calculated from the basic salary.
3. Leave Travel Allowance – It is an allowance received by the employee from his employer for travelling expenses incurred on domestic travels made during leave from work. The LTA is paid only for two trips made in a block of four years. It includes the expenses of the journey such as bus fare, train ticket. LTA is also a part of the gross salary received by the employee.
4. Telephone or mobile phone allowance – The reimbursement of mobile and telephone expenses to the employee forms part of the gross salary paid to him.
5. Conveyance allowance – It is offered in addition to the basic salary to compensate for the employees’ travel expenses that they incur for travel to and from their place of work.
6. Special/Other allowance – The employer may pay other allowances to the employee for meeting certain expenses which are not covered under different heads. These are included in the special/other allowances.
7. Perquisites – Perquisites or perks are benefits given to employees at discounted rates or free of charge. They form part of the gross salary.

What is Net Salary?

After clarifying the gross salary, let us now understand the other term ‘Net Salary’.

• Net salary is the part of your salary that you receive as cash in hand. Net salary is calculated after subtracting contributions made for the pension fund, provident fund, gratuity, and any other statutory funds and professional tax and income tax amount from the gross salary. 
• Net salary is also known as take-home salary, which is available to you after all deductions. It is crucial to work out the take-home salary at the salary negotiations before agreeing to take up the employment. It will give you an idea of whether the job will be able to satisfy your income and saving goals or not.

Also Read: Salary Calculator 2020-21 – Take Home Salary Calculator India

What Is The Meaning Of Cost To Company (CTC)?

CTC means the total amount spent by the employer on an employee in a year. It is the cost incurred by the company on its most valuable assets, which are its employees. A company has to spend a significant portion of its money on hiring and maintaining skilled, qualified and able employees. The employer has to offer an excellent salary to attract new employees to join their business.

• The employees expect to be paid for the work performed by them in their professional capacity and valuable time and efforts in working for the organisation. The employees contribute a lot of time working for the organisation, so they also expect that the organisation will also take care of their future after retirement. 
• That is why the employer also contributes to the employee’s employee provident fund, pension fund, and gratuity. The contributions made to the post-retirement benefit schemes are also included in the cost to company.
• It is the organisation’s responsibility to ensure the safety and good health of its employees and their family. The employees are also provided with health insurance, life insurance, reimbursement of medical expenses and other benefits. These benefits also form part of the cost to company.
• Cost to company also includes variable payouts such as bonus or commission paid to the employee based on annual performance. The variable payout is calculated as a certain percentage of an employee’s basic salary.
• The in-hand salary is always less than the cost to company mentioned in the offer letter. This is because there are some expenses the employer directly bears for the employee instead of paying it to them. Even though such costs are not reflected in the salary cheques, the employee gets its benefit.
• Cost to company and its components vary from organisation to organisation. For example, a banking company provides loans to its employees at concessional rates. Some other companies offer food coupons for lunch. Thus, the cost to company is the total expenditure from the point of view of the employer. It includes money spent on an employee for salary, reimbursement, allowance, gratuity, post-retirement benefits, insurance, or other expenses.

Let us take an example to know how to calculate gross salary, net salary and Cost to Company:

Mr A works in a private company, and he receives a gross salary per annum of Rs.   6,00,000, and his take-home salary is Rs. 5,34,000. The components of his salary are as follows:

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Based on the above details –

• Gross salary is calculated by adding basic salary, house rent allowance, leave travel allowance and special allowance to arrive at Rs 6,00,000.
• Calculate the net salary by subtracting the amount of Provident Fund, Gratuity, Insurance premium and Professional Tax from the Gross Salary. Therefore, Net salary shall be Rs 5,34,000.
• Cost to Company in this example is the total of all the benefits, including the contribution of provident fund and gratuity paid to the employee and deduction of insurance premium, in a year. Therefore, CTC is Rs 6,63,500.
• The professional tax deducted from the employee’s gross salary does not form part of the Cost to Company. This is because it is purely an employee’s payment. The employer does not reimburse or contribute to the employee for the payment of professional tax.
• It is a very common practice that companies mention the Cost to Company in the offer letter as the amount offered to the employee. The companies are concerned with the Cost to company, whereas the employee wants to know his take-home pay. Sometimes, the employees misunderstand this amount as the net take-home salary and accept the offer.

Therefore, it is very important to have a basic knowledge of these terms to negotiate the salary correctly. You have learned the difference between CTC and gross salary and how to calculate gross salary from CTC. Now you can calculate your take-home salary with the employer before accepting the employment offer. It is always advisable to clarify with the employer about the variable and fixed components of your salary. Having a good knowledge of your salary’s various parts can help you make a well-informed decision for making future investment and retirement plans.