Gross Salary vs. Net Salary - What are the main differences?

You’ve just started working and are confused about the difference between gross salary and net salary.

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Gross salary is the total amount an employee gets from a company. It includes basic pay, benefits, and taxes. On the other hand, the employee receives the net salary in-hand after all the deductions.

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Financial jargon like Gross Salary, Net Salary, CTC, and in-hand salary can be confusing. Hence in this article, we will explore everything from their meanings, differences, and how to calculate them accurately.

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Let's try to get a clear understanding of these terms and navigate your compensation package with confidence.

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This article is for informative purposes and does not represent the salary structure for any particular organization

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Meaning of Gross Salary

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Gross Salary is the sum of all the components that make up your salary package as an employee. These are your earnings before all mandatory and optional deductions.

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You should get a detailed breakdown of all the components that make up your gross salary and your benefits in your employee salary slip.

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Gross annual income and annual gross compensation are terms that mean the same thing. They refer to the total money a person earns in a year. This includes salary, bonuses, commissions, and other types of pay.

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In essence, these terms convey the same concept of the overall income that individuals earn before any deductions occur.

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Components of Gross Salary
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1. ‍Basic Salary: It is the fixed portion of the salary and forms the foundation of the salary structure. The company calculates other allowances and benefits based on the basic salary. ‍
2. Dearness Allowance (DA): DA is an allowance provided to employees to help them cope with the rising cost of living. Employers usually calculate it as a percentage of the salary, and it may vary based on inflation rates.
3. ‍House Rent Allowance (HRA): This is given to employees to cover their rental expenses. It is a part of the basic salary. It can change based on where the employee works and the company's rules.
4. ‍Conveyance Allowance: This allowance is provided to employees to cover transportation expenses related to commuting to and from work. ‍
5. Leave and Travel Allowance: This allowance helps employees pay for travel costs during their leaves or vacations. You can use it for various travel-related expenses such as airfare, accommodation, and sightseeing. ‍
6. Performance and Special Allowances: Managers give these allowances to employees as rewards for their performance. They also help pay for special skills or extra responsibilities. The amount may vary based on individual performance or specific job requirements. ‍
7. Other Allowances: This category includes various additional allowances that may be provided by the employer based on company policies or industry standards. Examples include medical allowances, meal allowances, telephone allowances, and entertainment allowances.

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Read more about Salary Slip components here.

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How to Calculate Gross Salary?

The Salary components can vary among different organizations, we will take the following example to understand the calculation better - 

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Here’s a salary structure or ctc:

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Gross Salary = Basic Salary + HRA + Special Allowance + L.T.A + P.F

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Gross Salary = ₹3,50,000 + ₹1,75,000 + ₹81,600 + ₹70,000 + ₹23,400 =  ₹7,00,000

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The total Gross Salary is  ₹7,00,000

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What is CTC?

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CTC in salary, or Cost to Company, is the total cost incurred by a company for employing an individual.

It encompasses various components like basic salary, allowances, and deductibles (such as taxes and provident fund). In most cases gross salary and CTC is the same amount.

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In some cases, CTC can also include additional components such as ESOPs.

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Meaning Of Net Salary

Net salary, commonly known as take-home salary, refers to the actual income received by an employee after deductions.

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It shows the money you can use for yourself. This amount is what you earn after taxes, provident fund contributions, and other deductions. 

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How To Calculate Net Salary

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You must have heard terms like in- hand salary calculator. Here you’ll learn how to calculate your net salary without a salary calculator

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Let's take the same example again - 

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The Gross salary as calculated before is  ₹7,00,000

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Net Salary =  Gross Salary - (PF Employee Contribution (₹1800/month) + PF Employer Contribution (₹1800/month)  +PF EDLI & Admin Charges (₹150/month) + Professional Tax (₹200/month) ) - Taxes.

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As per the new tax regime if your CTC is under ₹7,00,00 there is no taxes applied.

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But as the CTC increases there will be certain taxes applicable to your gross salary after the standard deduction is removed. Hence your net salary or in-hand salary will be credited after the taxes are applied.

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Net Salary = ₹7,00,000  - (₹21,600 +₹21,600 +₹1,800 +₹2,400)  = ₹6,52,600/year

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Which will be ₹54,383/month.

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This will be the in-hand salary that will be credited to your account

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Gross Salary vs Net Salary

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Here are some key differences  between gross salary and net salary:-

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 FAQs

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1) Is gross salary your CTC?

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Answer: CTC which stands for the cost to company is not your gross salary. CTC is similar to your gross salary, but it can include extra items. For example, it may have ESOPs that are not part of your gross salary.

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2) What is gross salary vs net salary vs ctc

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Answer: CTC stands for cost to company. It refers to the total cost of hiring a candidate. This includes all parts of a salary slip.

Gross salary is inclusive of all the deductions. It includes salary before any taxes and includes all the allowances in the form of housing, and health provided by the company whereas net salary is calculated after making all the necessary deductions and taxes.

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3) Is tax on net salary or gross salary?

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Answer: Tax is deducted while calculating net salary, gross salary is inclusive of all deductions and taxes.

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4) What is net pay in salary?

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Answer: Net pay is calculated after deducting any deductions and taxes from gross salary. It can be written as

Net Salary = Gross Salary - deductions - taxes

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P.S. - Now that you’ve started earning, how about starting investing from now itself?

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The sooner, the better. Your future self will thank you for it. Take a look at this article if you’re interested in Savings & Investing in Digital Gold