Salary, Net Salary, Gross Salary, Cost to Company are they same or different.

For most people it is plain confusion

especially when one gets a new job. The excitement of getting first job is punctured on getting the first pay. It is usually
less than what the fresher employee expected. Usually in the campus interviews company advertise their Cost to
Company (or CTC) and people mistake their salary to be based on that (CTC/12). Educated but have No Financial
Education is about the confusions of a new employee. In this article we shall try to cover what makes the salary? What
is the difference between Salary, Net Salary, Gross Salary, Cost to Company .

What is Salary? What is Basic Salary in India?

How people earn money?
The three broad ways in which people earn money are as follows:

Working for someone else or Employee ,

Working for themselves or Self Employed ,
and running a business.
When a person works for someone else or company, (s)he is then said to hold a job and is called Employee . The
person or the company he or she works for is called Employer. Money that is paid is called as Salary or Income or
Wage.

Salary
As explained earlier Money that is received under Employer-Employee relationship is called as Salary . If one is
freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such
case your income would be treated as income from business and profession).
Did you know that word salary has come from Latin salrium based on salrius which means pertaining to salt. The
word appeared in 1350-1400. In those days, salt , regular ordinary table salt, was a prized and valuable commodity. It
was money given to Roman soldiers to buy salt. The phrases the salt of the earth or worth your salt refer to the high
value of salt.
The salary consists of following parts.
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other
components may be calculated based on this amount. It usually depends on ones grade within the companys salary
structure.It is a fixed part of ones compensation structure. The basic salary differs according to the type of the industry.
For instance, employees in the information technology industry get more take-home salary while employees in the
manufacturing companies get more fringe benefits. Within a company Basic Salary generally depends on her or her
designation. Any increment in the salary is expressed as percentage of Basic salary
Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service
requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch
Allowance, Conveyance Allowance , Childrens Education Allowance, City compensatory Allowance etc. Allowance can
be fully taxable, partly or non taxable. One can read Understanding the components of your salary and their taxation for
more details.
Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free
unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club
facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of
Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.
How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to
each of these components and charges a tax on them. The calculation of this value varies from category to category.
Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be
considered as perquisites.

Deductions: Two type of deduction are made from salary

Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) .
Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc

Provident Fund Contribution

Provident fund contribution or EPF has two sides the employers contribution and employees
contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly
deposited in Provident Fund(PF) account and paid to employee when he retires or resigns.There is also employees
contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on
provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)

Different types of salary

Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other
components may be calculated based on this amount. It usually depends on ones grade within the companys salary
structure.It is a fixed part of ones compensation structure. Many allowances and deductions are described in terms
of percentage of the Basic Salary. For example Your PF is deducted at 12% of your Basic Salary. HRA is also
defined a percentage of this Basic Salary.
Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company: Companies use the term Cost to Company to calculate the total cost to to employ . i.e. all the
costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These
include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you
not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net
salary.
Direct Benefits refer to amount paid to the employee monthly by the employer which forms part of his/her take home
or net salary and is subject to government taxes.
Indirect Benefits refer to the benefits that employees enjoy without paying for them. The company pays them on
behalf of the employee but adds these expenses to the employees CTC as it is an expense from the companys point
of view.
Savings contribution refers to the monetary value added to the employees CTC example EPF, Gratuity
CTC = Direct Benefits + Indirect Benefits + Savings Contributions
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.

How to calculate Pay? How to calculate Take Home

Salary?
With different types of salary questions that a new employee comes up with are How to calculate Pay? How to calculate
Take Home Salary? What is Basic Salary Calculation in India? How is HRA calculated in salary?
Basic is either 50% or 60% of the Gross salary and depends if you want to escape from PF liability.. and rest of the
entitlements are calculated accordingly..

Your Take-home salary will include

Gross Salary received each month
minus allowable exemptions such as HRA, LTA, conveyance allowance etc.
minus income taxes payable (calculated after considering Section 80 deductions)
Your Cost to Company (CTC) includes
Salary received each month
Retirement benefits such as PF and Gratuity
Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the
office, a phone provided to you and bills reimbursed by your company.
What are allowances? What does your Allowance include?
Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for
meeting specific requirements of the employees. Some allowances are taxable,some are partially taxable and some
are tax free. There are various Kinds of Allowances that one can get under the Head Salary. Some popular Allowances
are
House Rent Allowance or HRA : The allowance is for expenses related to rented accommodation. Salaried
individuals who live in a rented house/apartment can claim House Rent Allowance or HRA to lower taxes. This can be
partially or completely exempt from taxes. Our article HRA Exemption,Calculation,Tax and Income Tax
Return explains how HRA is calculated in salary in detail.
Conveyance allowance is given to employees to meet travel expenses from residence to work. The conveyance
allowance for up to Rs.9,600 per annum is exempt from tax. Starting FY 2015-16, this limit has been increased to
Rs.19,200 per annum.
Leave Travel Allowance: Salaried employees can avail exemption for a trip within India under Leave Travel
Allowance. The exemption is only for shortest distance on a trip. This allowance can only be claimed for a trip taken
with your spouse, children and parents, but not with other relatives.
Income Tax webpage talks of the Allowances available to different categories of Tax Payers, what are the
exemptions available on Allowances, under which section of Income Tax Act.
Lets see an example explaining the salary. An arbitrary salary break up is given below (Note: salary structure varies
from one company to another):
Component of Salary(per annum or p.a)

Amount

Basic Salary

480,000

Dearness Allowance

48,000

House Rent Allowance

96,000

Conveyance Allowance

12,000

Entertainment Allowance

12,000

Overtime Allowance

12,000

Medical Reimbursements

15,000

Gross Salary

6,75,000

Benefits vary from company to company. Example of benefits for the above employee are:
Medical insurance

2000

Provident Fund (12% of Basic)

57,600 (12% of 4,80,000)

Laptop

50,000

Total Benefits

109600

Cost to Company=Gross Salary + Benefits

6,75,000 + 109600=7,84,600

Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would
be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet)
would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies
from company to company. One can read Cost To Company or CTC salary: Understanding and Calculation for more
details.
How tax affect the various components of salary
Component of
Salary(per annum or
Taxable
p.a)
Amount Tax
Amount
Basic Salary

480,000

Full amount is taxable

480,000

Dearness Allowance

48,000

Depends on company policy. Mostly fully taxable.

48,000

96,000

Applicable if living in a rented house. Minimum of three

amounts (Note:Calculation shown below)

52,800

House Rent
Allowance

Conveyance
Allowance

12,000

Conveyance allowance of Rs 9,600 per annum is exempted

from tax. If salary component is more than 9,600, the
remaining part is taxable.In this case:12,0009600=2400Starting FY 2015-16, this limit has been
increased to Rs.19,200 per annum.

Entertainment
Allowance

12,000

Depends on company policy. Mostly fully taxable.

12,000

Overtime Allowance

12,000

Fully taxable

12,000

Medical
Reimbursements

15,000

If substantiated with bills, are exempt to a limit of Rs 15,000

annually

Gross Salary

6,75,000

Gross Taxable Salary

2,400
Before FY
2015-16

0
6,07,200

HRA Calculation
As explained in HRA Exemption,Calculation,Tax and Income Tax Return , the minimum of the three amounts will be
exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in
any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)
So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.
So the portion that will be taxed in this example is = 96,000 43,200 = 52,800
Tax
As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too.
Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103.
For tax estimator Tax Calculator from AY 2010-11 is is very helpful.
Tax
57,103
Employee PF contribution(12% of Basic)

57,600

Professional Tax

2400

Total Deductions

1,17,103

Net Salary = Gross Taxable Salary Tax

=6,07,200- 1,17,103=4,90,097

Net Monthly Salary

=490097/12=40,841.41

Can Take Home salary be increased?

Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs
1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes.
So now employee in above example will be taxed on 6,07,200- 1,00,00 = 5,07,200.

Amount to be taxed

5,07,200

Tax

33,413

Employee PF contribution(12% of Basic)

57,600

Professional Tax

2400

Total Deductions

93,413

Net Salary = Gross Taxable Salary Tax

=6,07,200- 93,413=5,13,787

Net Monthly Salary

=513787/12=42,815.58

Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in this infographic. Optimum
Salary Structure Maximum In Hand Salary Or Minimum Tax Liability explains how restructuring the salary would
increase the take home

Proof of Salary being paid: PaySlip, Form 16

PaySlip
A paycheck is a document/record issued by an employer to an employee which shows how much money an employee
have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all
taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable
contributions taken out of the gross amount to arrive at the final net amount of the pay. One can read format of
payslip or see a sample here.

Form 16
If you are salaried employee in an organization, then you get the salary after deducting tax by the employer. This process
is called as Tax Deduction at Source (TDS). Company must issue a Form 16 which contains the details about the
salary earned by that employee and how much tax deducted. The Tax deducted is paid to government by the
company. Form 16 is the proof of employees income and tax paid to the govt. It is issued under section 203 of
Income Tax Act for Tax. Tax payer has to use the Form 16 to file the Income Tax return every financial year. One can
read Understand Your Form 16
Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, the web
site or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is
supplied with the content (consisting of articles and information).Do you know the biggest employers in the world.
Wal-Mart , a chain of department stores across the globe, employs 2.1 million employees worldwide. The Indian State
Railways which has 1.42 million employees, is largest employer in India.Ref: Salary Income Tax Heads of
Income: Salary Understanding CTC and Your Salary Breakup, Tax implications of salary components, All you wanted to
know about CTC
Earning section of our website bemoneyaware.com covers: basics of earning such as How people earn money by
working for someone else , How people earn money by starting their own business, Factors on which persons income
depends , Story on when we value money,Profit and Loss, Salaries of some famous Indian personalities, Salaries of
some famous International personalities, Best jobs in the world, Worst jobs in the world
Hope we are able to explain the difference between Salary, Net Salary, Gross Salary, Cost to Company. Did you find
information useful? If you find some information missing or incorrect please let us know.