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What is Net Salary, Concept of Net Salary and Gross Salary

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What is Net Salary, Concept of Net Salary and Gross Salary. Calculation of Net Salary and Gross Salary. When we become professionals, most of us go for jobs. To be frank, our work profile is as important to us as our pay package is! But, very few of us understand the true meaning of various terms like Gross Salary, CTC (Cost to Company), Take Home Salary, Net Salary, etc.

What is Net Salary, Concept of Net Salary and Gross Salary

Net Salary and Gross Salary

So, let us here try to make an attempt to understand the various terms associated with Income under the Head ‘Salary’.

Cost to Company: It is basically the cost incurred by the company on hiring & sustaining the employee. Generally, it is similar to Gross Salary except for the difference of gratuity and Provident Fund. CTC includes all Allowances, Perquisites, Provident Fund, Medical Insurances, Gratuity, Pension etc.

The CTC also includes free meal coupons, or concessional meal coupons, money spent on their refreshments and entertainment, as well as, if any cab services are being provided by the company for the employees.

The CTC covers both Direct Benefits, Indirect Benefits & Savings Cover.

The following is a diagram which gives us an illustrative list of the things covered under Cost to the Company and their bifurcation into Direct and Indirect Benefits as well as savings for their future.

Direct Benefits Indirect Benefits Savings Contribution
Basic Salary Interest Free Loans Superannuation benefits
Dearness Allowance (DA) Food Coupons/Subsidized meals Employer Provident Fund (EPF)
Conveyance Allowance Company Leased Accommodation Gratuity
House Rent Allowance (HRA) Medical and Life Insurance premiums paid by employer  –
Medical Allowance Income Tax Savings  –
Leave Travel Allowance (LTA) Office Space Rent
Vehicle Allowance
Telephone/ Mobile Phone Allowance
Incentives or bonuses
Special Allowance/ City Compensatory allowance, etc.

Gross Salary is the total salary inclusive of all allowances & perquisites which are paid by the company to and for a particular employee. It includes Basic, Dearness Allowance, other Allowances, Perquisites and includes the cost of all services borne by the company for the employee. Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC).

It includes bonus, overtime pays, etc.

Net Salary/ Take Home Salary: The net salary is same as Take Home Salary. As the name suggests, it is that salary which the employee actually gets in hand. TDS & other required deductions are made from the Gross Salary to arrive at this figure. Thus, this is the salary which an employee actually takes at home.

We can calculate Net Salary by doing the following calculations:

Gross Salary – TDS – Contribution towards PF – PT (Professional Tax)

In this way, we can analyze what we will actually earn if we are just aware of the Cost to the Company. Also, make sure you do all these calculations if you get an offer from a company and then decide of accepting or rejecting the offer.

Difference between Gross Salary and Net Salary?

The difference between gross salary and net salary is that while gross salary is your salary before any deductions are made from the salary, net salary is the salary an employee takes home after all deductions have been made.

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About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at [email protected]

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