What Is A Take-Home Salary Calculator? (Components And FAQs)
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Take-home salary is the amount an employee gets in their account at the end of every month. An employer fixes the salary based on a pre-defined salary structure that includes many components. Understanding how to calculate your take-home salary may help you know the net salary offered to you and how much tax amount you are liable to pay. In this article, we discuss the components of a salary structure, outline various salary calculation formulas, define a take-home salary calculator and answer some frequently asked questions about employee salary.
What is a take-home salary calculator?
A take-home salary calculator is a tool that calculates the salary you receive in your account after all incentives and deductions. There are a few fields in a calculator where you can enter values such as your base salary, bonus and other details. The calculator displays your approximate in-hand salary along with a few other details, like contributions to the employee provident fund, employee provident insurance and professional tax. The calculator displays the result using a few formulas.
A salary involves many variables that may vary across organisations by a considerable margin, and not all salary calculators take this into account. It is always better to understand how these fixed and variable components work together to calculate a take-home salary.
What is cost-to-company (CTC)?
Cost-to-company (CTC) is the sum of money a business spends on an employee. Employers generally express CTC as a yearly value. The components that make up this figure include basic pay, provident fund, allowances, bonuses and taxes, regardless of whether the employer pays them in-hand or reimburses them through another source, like insurance coverage plans.
Components of a salary
The components of a salary may vary slightly across organisations. Here are the common components of a salary:
It is the employee's basic income and is generally between 40% and 50% of the gross salary. It is a fixed component that serves as the foundation of a salary calculation. The basic salary does not include any allowances or bonuses and any deductions, such as income tax.
Dearness allowance (DA)
Dearness allowance is a percentage of the basic salary paid to employees to help them cope up with the rising cost of living. Since the cost of living depends on location, the DA component of one's salary can vary depending on their location. The DA component is fully taxable for salaried employees.
House rent allowance (HRA)
It is a component of the income businesses offer to employees who live in rented houses. The HRA is tax-free in part or entirely. It is fully taxable if you do not live in a rented property.
Leave travel allowance (LTA)
Employers may offer a leave travel allowance to employees to help them cover their travel expenses. To be eligible for the reimbursement, employees show proof of travel expenses. LTA is an important component of a salary, as it is usually eligible for income tax exemptions.
Other allowances are fully taxable components that the employer pays apart from your basic salary. Additional allowances may include special allowance like entertainment, servant allowance, cash, overtime, meal allowance and more. These allowances vary across organisations and job roles.
The bonus is a performance reward paid by the employer to the employee. Gross salary includes the bonus and is taxable in the employee's hands. Employer provides Form 16, containing all the information about TDS (Tax Deducted at Source) deductions from salary, including bonuses.
Employee provident fund (EPF)
With every salary, both the employer and employee contribute 10% or 12% of the basic salary to the EPF. The employee's contribution towards EPF is non-taxable. With women employees, the minimum employee contribution requirement is 8% for the first three years. The upper limit of monthly EPF contribution is 12% of ₹15,000.
Professional tax is a state-imposed tax on employment. The state may impose a maximum of ₹2,500 per year as a professional tax. Professional tax varies across states. An employer may deduct professional tax from an employee's gross compensation under section 16 (iii) of the Income Tax Act 1961.
It is a sum of money paid by an employer to an employee under the Payment of Gratuity Act of 1972. After a set term of service (usually five years), the organisation offers the employee a payment equal to 15 days' compensation. The employer pays gratuity as a token of appreciation to the employee for their long service.
Employers usually provide employee life and health insurance. Every month, the employer deducts a small amount from the employee's pay for insurance. The CTC includes the insurance premium.
The employer deducts a tax amount from the employee's salary based on the tax slab and tax rate. They deduct it before processing the employees' salaries, hence it is called tax deduction at source (TDS). The employer provides Form 16 to their employees to share details of the tax deduction.
Salary calculation formulas
Since salary calculations have many variables, consider using different formulas to calculate the components of a salary. After that, you may calculate your take-home salary. Following are a few basic formulas:
Gross salary = CTC - (EPF + Gratuity)
Gratuity = n*b*15 / 26, where n = tenure of service completed in the company, b = last drawn basic salary + dearness allowance
Take-home salary = Gross salary - (Income tax + professional tax + EPF contribution)
Calculating take-home salary
Consider this example to help you figure out what your take-home pay is:
Ramesh's annual CTC is ₹13 lakhs and he gets ₹1 lakh as a bonus. He lives in a state where the professional tax is ₹2,000 per year. His employer pays ₹4,000 every year towards his health insurance and he has opted for a 12% contribution to EPF. You can determine his take-home pay by calculating the different components of his salary and his deductions:
1. Annual gross salary: Calculate this by subtracting the bonus from the annual CTC:
₹13 lakhs - ₹1 lakh = 12 lakh
2. Total EPF contribution: The upper limit of EPF contribution every month is:
12% of ₹15,000 = ₹1,800 per month. So the total EPF is:
₹1,800 x 12 x 2 = ₹43,200 per year
3. Total professional tax, EPF contribution and insurance: In Ramesh's case, the sum total would be:
₹2,500 + ₹43,200 + ₹4,000 = ₹49,700
4. Yearly take-home salary: Subtract the total deductions from gross salary.
₹12 lakhs - ₹49,700 = ₹10,51,300
5. Monthly take-home salary: Divide the yearly take-home salary by 12.
₹10,51,300/12 = ₹87,608
Related: Salary Negotiation Tips And Examples
FAQs about employee salary
Here are some frequently asked questions about salary structure and salary components:
What is the difference between cost-to-company and gross salary?
CTC is the overall cost of employing and keeping employees. It includes your income plus any employer-paid benefits, including provident fund contribution, rental allowance, health insurance and other allowances. CTC may also include taxi services and food coupons. So, CTC is your employer's total cost to retain you. The sum varies per company and advantages. The CTC also affects the take-home pay.
The gross salary is the amount left after deducting gratuity and EPF from the CTC. The gross salary is always bigger than the take-home pay. It includes bonuses, overtime pay and any other employer-provided incentives.
How much of HRA is exempted from income tax?
The total amount of HRA employees receive is not always tax-free. The tax exemption is usually the smallest of the following:
the amount of HRA received from the employer
actual rent paid minus 10% of salary
50% of the basic salary for those living in metro cities, or 40% of the basic salary for those living in non-metro cities
What is EPF and how to calculate it?
If the employee's basic income is more than ₹15,000 per month, they have the option of contributing to the employee provident fund. EPF is a retirement savings plan designed specifically for employees and intended for a more extended period. The employer equally matches the EPF contribution. It is usually 10% or 12% of the basic salary chosen by the employee. The employer contribution comprises the following:
employee provident fund - 3.67%
employee pension scheme (EPS) - 8.33%
employee deposit linked insurance (EDLI) - 0.5%
EPF administration charges - 0.5%
You earn an interest rate of 8-9% on your EPF balance. This high rate of interest makes it easier to plan for retirement.
Please note that none of the organisations mentioned in this article are affiliated with Indeed.
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