Gross Salary in India - Definition, Components, & Differences

Various Components of Gross Salary

Listed below are the various components that together make up the gross salary.

• Basic salary, pension component, gratuity component, salary arrears, fee or remuneration, payment for overtime, ex-gratia and performance-related cash awards
• Allowance such as house rent allowance, medical allowance, leave travel allowance, dearness allowance and other such special allowances
• Perquisites like rent for accommodation, electricity, water and fuel charges
• Pension received from former employer

Let us look individually at each of the components listed above.

Basic Salary

Basic salary is the exact amount of salary before any deductions are made or extra components are added to the salary. The basic salary for an employee is usually lower than the gross salary or the take-home salary.

Gratuity

Gratuity is a part of salary that is paid by an employer to an employee to express gratitude for his/her services in the company. The employer may provide gratuity out of its own pocket or can avail a gratuity group plan from an insurance provider. Gratuity is generally paid to an employee on his/her retirement or when he/she leaves the company. However, according to Section 10(10) of the Income Tax Act, gratuity is payable only when an employee has completed 5 years with his/her company. The gratuity received by employees is taxable as “income from salary”.

HRA or House Rent Allowance

HRA or House Rent Allowance is a salary component paid by employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person's salary. HRA is applicable to both salaried as well as self-employed individuals.

Salary Arrears

Salary Arrears refer to any amount that is paid as a result of salary hike. Generally salary arrears come in lump-sum for more than 1 month of time. For example, if your salary was increased in June but is applicable from the month of January. Then you are eligible to receive arrears worth the last 6 months.

Perquisites

Perquisites are benefits received by an employee as a result of his/her official position and are payable in addition to the salary received by them. Perquisites or fringe benefits can be taxable or non-taxable depending upon their nature.

These components are taxed separately from the employer’s account so as to maintain transparency and accountability.

Pension

Pension is defined as a specific amount paid regularly to an employee who has retired from his job. Pension is either paid by your employer or the government in case of government sector employees.

Components that do not Form Part of Gross Salary

Following are the few things that do not form part of gross salary paid by an employer to an employee.

• Reimbursement for medical expenses
• Leave Travel Concession
• Leave encashment rolled out at the time of retirement of employee
• Free meals or snacks or refreshment provided by the employer to its employees, during office hours
• Gratuity

Gross Salary Calculation

Before making any deductions, which include tax deductions, the gross salary of an employee is calculated by adding up their basic pay and allowances. The basic salary is an employee's base pay or the fixed portion of their compensation package. To calculate the gross salary, the following formula is used:

Gross salary = Basic salary + HRA + Other Allowances

Example: Here is the salary structure of an employee:

Gross salary = Rs.25,000 + Rs.9,000 + Rs.1,300 + Rs.1,600

Total Gross salary = Rs.36,900

The Provident Fund is not considered when calculating the gross salary. Furthermore, because gross salary is calculated by gross annual income before deductions are made, the amount of income tax has no impact on it.

Difference between Gross Salary and Net Salary?

The differences between gross salary and net salary are mentioned in the table below:

Calculation of Gratuity based on Gross Salary

Gratuity can be calculated on the Gross Salary of an employee if the employment contract is unclear about the basic salary drawn by the employee.

What's the Difference Between Basic and Gross Salary?

1. Basic salary is a rate of pay agreed upon by an employer and employee and does not include overtime or any extra compensation.
2. Gross salary, however, is the amount paid before tax or other deductions and includes overtime pay and bonuses.
3. For instance, if an employee has a gross salary of Rs. 40,000 and a basic salary is Rs.18,000, he or she will get Rs.18,000 as fixed salary in addition to other allowances such as House rent allowance, conveyance, communication, dearness allowance, city allowance or any other special allowance.

Cost To Company - CTC

Cost to Company or CTC as it is commonly called, is the cost a company incurs when hiring an employee. CTC involves a number of other elements and is cumulative of House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance among other allowances which are added to the basic salary.

These allowances may often include free meals or meal coupons, such as Sodexo and the like, office space rent, cab service to-and-fro office, and subsidized loans etc. Basically, all these elements when combined together, form the entire Cost To Company.

To put it in simpler terms, CTC is basically a company's spending on hiring and sustaining the services of an employee.

CTC is considered a variable pay as it varies based on various factors and thus when the CTC varies, the take home salary or net salary of the employee varies. This can be corrected by an individual by simply matching the CTC to the actual amount they are receiving.

CTC is basically the sum total of Direct Benefits (sum paid to an employee on a yearly basis), Indirect Benefits (sum the employer pays on behalf of the employee), and Saving Contributions (saving schemes the employee is entitled to).

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

Gross Salary

Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC). To put it in simpler terms, Gross Salary is the amount paid before deduction of taxes or other deductions and is inclusive of bonuses, over-time pay, holiday pay, and other differentials.

Employee Provident Fund, in India, is an employee-benefit scheme prescribed by the Ministry of Labour which provides employees with facilities such as medical assistance, retirement, education for children, insurance support, and housing. The Employee Provident Fund Organisation (EPFO) has the authority to mandate policies on EPF, pension, and insurance schemes. The employer is required to contribute at least 12% of the employee's salary towards his/her EPF.

Furthermore, the employee can then withdraw the full amount accrued in his/her PF account at the time of retirement, which is when the employee attain the age of 55 years.

In the occurrence of any of the following situations also, the employee can withdraw the amount accumulated in his/her PF account-

1. Termination of services
2. Retirement due to permanent disability
3. Migration for taking employee abroad

PF calculated on Gross Salary

Gross pay for the purpose of PF calculation is different from the term gross pay which is typically used in the payroll context. For the sake of clarity, we will use the term PF Gross in this post to denote the salary to be considered for PF calculation. PF Gross includes Basic, DA, Conveyance, Other Allowance etc. (heads of pay which are included for PF calculation) and excludes House Rent Allowance, Bonus etc. (heads of pay which are excluded for PF calculation) as per the provisions of the PF Act.

Deductions from Gross Salary

For the calculation of Income Tax, gross salary minus the eligible deductions are considered. For example, you will have to deduct HRA exemption, any home loan EMI, investments under sections 80C and 80D and similar such things for calculation of taxable income.

This taxation process is different for self-employed and salaried individuals.

Gross Salary Under Section 17(1)

According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year

1. Wages;
2. Any annuity or pension; (Family pension received by heirs of an employee is taxable under income from other sources);
3. Any gratuity;
4. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages;
5. Any advance of salary;
6. Any payment received by an employee in respect of any period of leave not availed of by him; (Leave encasement or salary in lieu of leave);
7. The annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; and
8. The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognised provident fund to recognised provident fund.
9. 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 8OCCD.

Salary Reporting on Taxes

India has two types of taxes according to the Income Tax Act, 1961:

1. Direct Tax: A taxpayer pays this tax directly to the government. Direct taxes include income tax, wealth tax, gift tax, and more.

1. Indirect Tax: A taxpayer make this tax payment to the government with the involvement of an intermediary. The GST Act was implemented by the Indian government as a comprehensive indirect tax.

An income tax is a type of direct tax the government imposes on a taxpayer. Salary income is one of many types of income that are taxed under the Income Tax Act. This also covers the taxable income that employers paid to the employees.

The table below represents the income tax rates and slabs:

The most popular ways for salaried employees to reduce their income taxes are Sections 80C and 80D. Investors in these tax-saving options are eligible for tax deductions of up to Rs.1.5 lakh. Here are a few of these Section 80C tax-saving options:

Here are a few of these Section 80C tax-saving options:

1. Premiums from life insurance plans
2. PPF contribution

1. Fixed deposit
2. Child’s tuition fee
3. Equity Linked Savings Scheme (ELSS)
4. Employee Provident Fund (PF)
5. National Saving Certificate (NSC)

1. Annuity or Pension schemes

Taxpayers may claim deductions for health-related costs under Section 80D. Salaried employees can avoid paying taxes on premiums paid for medical insurance for themselves, dependents, or family members. This healthcare premium may be paid by the employer on the employee’s behalf. The employer will deduct this amount from the employee’s gross salary. Additionally, this premium qualifies for a Section 80D deduction.

Taxation Process of Gross Salary

For calculation of Income Tax, gross salary minus the eligible deductions are considered. For example, you will have to deduct HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.

This taxation process is different for self-employed and salaried individuals.