Gross salary is the total salary you receive before any tax deductions. Both direct benefits, such as basic salary, house rent allowance, leave travel allowance, medical allowance and indirect benefits like performance-linked bonuses and meal coupons are components of gross salary. In this article, we explain what a gross salary is, the components of a gross salary, the difference between gross salary and net salary and the taxation process for self-employed and salaried individuals.
What is gross salary?
Gross salary is the monthly or yearly salary paid to an employee before any mandatory or voluntary deductions are calculated.
Gross salary includes overtime pay and bonuses. For example, if the gross salary of an employee is INR 50,000 and the basic salary is INR 20,000, they will get INR 20,000 as a fixed salary along with other allowances, like dearness allowance (allowance paid to government employees, public sector employees and pensioners to lighten the impact of inflation on their income), house rent allowance, conveyance, city allowance or any other special allowance.
Gross salary is offered in the form of CTC, also known as cost to the company. This is the total costs the company incurs due to your employment. It includes all the expenses that the company spends on you, such as your salary, allowances, medical facilities, canteen facilities, training cost, traveling facilities and so on. The pay amount you take home is not equal to CTC.
CTC is a collective of Provident Fund, also known as PF. Allowances like medical insurance and House Rent Allowance are additions to the base salary. The allowances may include free meals, subsidized loans and meal coupons, such as Sodexo, cab service to-and-fro office, telephone allowance, office space rent and others. All of these elements combine to form the entire cost to company.
CTC is considered variable pay, since CTC varies based on various factors. Thus, with the change in CTC, employee's net salary varies. CTC is direct benefits + indirect benefits + savings contributions.
Components of a gross salary
Your gross salary includes all these direct and indirect benefits:
- Basic salary: This is the fixed amount paid directly to employees that does not include incentives, bonuses, benefits or any other compensation from employers.
- Gratuity: Gratuity is a part of the salary paid by the employer as a token of gratitude for the services of the employee in the company. Gratuity is paid to an employee on retirement or when the employee leaves the company. However, Section 10(10) of the Income Tax Act states that gratuity is only payable only when an employee finishes five years of work at the company. The gratuity is taxable as “income from salary”.
- HRA or house rent allowance: HRA, or house rent allowance, is a salary component paid for covering the housing expenses of employees. Both salaried and self-employed individuals come under the purview of HRA.
- Salary arrears: Salary arrears is the outstanding amount paid to an employee as a result of a salary hike. For example, if you got a salary hike in January, but the hike was made applicable from July, then you are eligible to receive arrears of the last six months of the same year.
- Perquisites: Perquisites are fringe benefits paid to employees over and above the salary they receive.
- Pension: Pension is a specific amount paid regularly to employees after retirement from a job either by the employer or the government, in the case of government sector employees.
Ways to calculate gross income
The way you calculate gross income depends on whether you earn hourly or salary pay. Here is how you calculate each of them:
Your gross pay is the salary you and your employer agreed on when you were offered the position and should be listed in your employment contract. Gather your recent pay statements and determine how much you make per month. Since there are 12 months in a year, you'll multiply your monthly earnings by 12. For instance, you make $3,000 a month, your formula would be 3,000 x 12 = 36,000. Your gross income would then be $36,000 a year.
If you're paid hourly and the hours you work fluctuate throughout the year, the most accurate way to determine your gross salary is to read your pay statement at the end of the year. It should read 'gross salary' or 'gross earnings'.
If you do work the same hours every week, there's a simple formula you can use. Multiply the pay you make each hour by the number of hours you work each week. For instance, if you're paid $15 per hour and work 40 hours each week, your formula would be 40 x 15 = 600. This means your gross weekly pay is $600. Multiply it by four weeks to get your monthly gross amount: 600 x 4 = 2,400. Lastly, multiply this total by 12 to get your annual gross salary: 2,400 x 12 = $28,800 per year.
Difference between gross salary and net salary
While gross salary is an employee's salary without any deductions, net salary, commonly known as take-home salary in India, is the income that an employee takes home after all deductions are made, such as income tax at source (TDS) and deductions according to company policies.
Net salary is calculated after deducting income tax, the public provident fund and professional tax from the gross salary. The employee and public provident fund contributions are a minimum of 12% of an employee's basic salary, whereas gratuity contribution is typically 4.81% of an employee's basic salary. Therefore, an employee's net salary or take-home salary is a direct benefit minus all deductions.
What is the employee provident fund (EPF)?
Employee provident fund or EPF, is an employee-benefit program the Ministry of Labour prescribes, which offers facilities such as medical assistance, housing, insurance support, retirement benefits and education for children. The Employee Provident Fund Organisation (EPFO) authorises insurance schemes, EPF and pension policies. The employer must give 12% or more of their employee's salary toward their EPF.
As the employee, you're allowed to withdraw the full amount accumulated in your PF account when you retire, which happens when you're 55 years old. An employee is able to withdraw their EPF amount only after retirement. EPFO permits withdrawal of 90% of the EPF fund one year before retirement if the person is not less than 54 years old.
According to the latest EPFO law and rule, employees have the option to withdraw 75% of the total EPF after the passage of around a month of unemployment. The remaining percentage of 25% is completely transferable to a new account.
Reporting gross salary on taxes
To calculate your income tax, you'll deduct home loan EMI, HRA, investments that are listed under section 80C and 80D and other related items from your gross salary. The process of filing taxes differs for salaried and self-employed individuals:
Filing as self-employed
Self-employed individuals must file their income tax returns either through the ITR-4 or ITR-4S form. The ITR-4 form is for income from a profession or proprietary business, while the ITR-4S form is for those who have a presumptive business income. ITR-4 individuals can claim every expense they spend while performing their job to earn income. These expenses can be deducted when the employee presents valid proof.
Filing for salaried individuals
If you are a salaried employee with less than a total INR 50 lakh per year income (including salary income and income from other sources), you have to file ITR-1, which is also known as the Sahaj Form. For filing ITR 1, the individual should not have more than one house or property and their agricultural income should not exceed INR 5000.
ITR 2- is to be filed if you have income from more than one house property, from salary, income from capital gains and other sources.
ITR-3- has to be filed if you have income from house property, salary, income from a business or profession, capital gains and income from other sources. Therefore, check which form is applicable in your case before filing returns.
While filling in the ITR-1, you have to report gross salary and income from salary. Exempt allowances, such as HRA, have to be mentioned separately. You will also have to provide details for income earned from other sources, like interest income on fixed deposits and so on.