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Introduction
Gross salary in India is defined as the sum of all the components of the salary package offered to an employee. It is the salary before any mandatory or voluntary deductions. The employer generally provides the break up of all the components that constitute the gross salary. The basic salary is the base of the total fixed components of the whole compensation offered to the employees. Let us take a look at the concept in detail.
According to the Income Tax Act,1962 gross salary is defined as
(1) "salary" includes—
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance of salary;
(va) any payment received by an employee in respect of any period of leave not availed of by him;
(vi) 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;
(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 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) thereof; and
(viii) 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 80CCD;
Components Of Gross Salary
Basic salary
This is the sum that is paid to the employee exclusive of any benefits, perks, bonuses and incentives.
HRA or House Rent Allowance
This is the amount paid to the employee towards the housing expenses incurred by the employee.
Provident Fund Contribution
This is the employee’s share of the Employment Provident Fund. This is calculated as 12% of the fixed portion of the salary.
Bonus
The employee may receive an additional sum in a year based on his/her performance in the company. This is called the bonus received by the employee.
Perquisites
These include the benefits offered over and above the basic salary. These benefits may be monetary or non-monetary.
Special allowances and arrears
These include allowances given by the company for various costs incurred such as transport, uniforms etc. The arrears may be additional sums on any increments in the salary.
Pension
This is paid when the employee retires from the company or the Government in case of Government jobs.
Components That Are Not A Part Of Gross Salary
- Reimbursement given for medical expenses
- Leave encashment at the time of retirement of an employee
- Gratuity
- LTC or (Leave travel concession)
- Any kind of refreshments provided by the employer during office hours.
Gross salary v/s Net salary v/s CTC
| Gross salary | Net salary | CTC |
|---|---|---|
The salary before any kind of mandatory or optional deductions | The gross salary minus deductions | Cost the company incurs while hiring an employee |
Gross salary = Net salary | Net salary = Gross salary - deductions under sections of the Income Tax Act,1962 | CTC= Direct + indirect benefits plus savings contributions |
What are CTC and Net salary?
Gross salary is offered as CTC. It is the cost the company incurs due to your employment. It is inclusive of all the expenses the company incurs for retaining its employees. It is variable since it consists of variable factors. It is inclusive of Provident Fund, HRA, allowances, medical facilities, canteen facilities, training costs etc.
Net Salary is calculated after deducting income tax from the gross salary. It is the direct benefits provided minus the deductions claimed.
Deductions from Gross Salary
For the purpose of Income Tax, the gross salary minus the deductions are taken into account to calculate the tax for individuals or other entities. For example deductions under Section 80C and 80D, HRA and also any home loan EMI.
Gratuity and PF calculated on Gross Salary
If the employer has no fixed terms for the calculation of basic salary at the time of employment, then the gratuity can be calculated from the gross salary of the employee.
Organizations with more than 20 employees have to register with EPFO. Employees earning less than Rs. 15,000 as basic pay and dearness allowance have to compulsorily have an EPF account. Under EPF, 125% of salary employees' basic pay and dearness allowance is directed to EPF Account every month. PF is calculated on the gross pay which is different from the gross salary that is taken into account for the purpose of calculation of salary of an individual. It excludes HRA, bonuses etc.
How is Gross Salary taxed?
The below items are deducted to calculate the salary which will be taxed
- Standard deduction of Rs.50,000
- NPS deduction under Section 80CCD (1B)
- LTC that is exempt from tax
- HRA that is exempt from tax
- EPF contribution under Section 80C
- Deductions under Section 80C to 80U
- Tax-free allowances and perquisites
- Deduction under Section 80D
- Home loan interest under Section 24(b)
Filing Income Tax As A Self-Employed Individual
The returns are filed under form ITR4 and ITR4S. These are for profession/proprietary business and presumptive businesses respectively. In ITR4 the individual can claim every expense which is incurred to earn income.
Filing Income Tax As A Salaried Individual
For individuals with income less than Rs. 50 lakhs in total ITR1 is the Sahaj form is to be used. For this, the income from agriculture should be less than Rs. 5,000 and the individual; should not own more than one house.
ITR2 has to be filed if the individual has income from house property more than one, income from salary, capital gains and other sources.
ITR3 has to be filed if you have income from house property, business and profession and also capital gains and other sources.
Calculation of Gross Salary
Mr Hemant joined a company with a CTC of Rs. 10 lakhs. The basic pay is Rs. 7 lakhs and HRA is Rs. 2 lakhs. The other allowances are Rs. 1 lakh. The EPF contribution is Rs. 80,000, TDS is Rs. 1 lakh and professional tax is Rs. 50,000. Calculate gross and net salary.
Calculation of Gross Salary
Basic Pay = Rs. 7 lakhs
(+)House Rent Allowance (HRA)= Rs. 2 lakhs
(+) Other allowances = 1 lakh
Total Gross Salary Rs. 10 lakhs
Calculation of Net salary
Gross salary = Rs. 10 lakhs
(-) EPF contribution = Rs.80,000
(-)TDS = Rs. 1 lakh
(-) Professional tax = Rs. 50,000
Total Net Salary = Rs. 7,70,000
The Government imposes taxes as a system as the source of revenue for the country. These funds are utilized for the economic development and security of the nation.
FAQs
1. Does gross salary change with every employer?
Yes, every organization you work in will have a different pay structure and a different gross salary.
2. Where can you see the gross salary that is to be paid?
You can see the gross salary that is paid on the appointment letter provided by your employer or the salary slip issued.
3. What are the documents needed for filing tax on gross salary?
Form 16 and Form 26AS are the documents you will need to file taxes on your gross salary
4. What is the formula for gross salary?
Gross Salary = Basic salary + HRA + Other allowances
5. Is monthly salary gross or net salary?
The monthly salary you receive in hand is the salary you get after deductions and taxes from the employer.
6. Are perquisites only monetary?
No perquisites are both monetary and non-monetary.