Gross Salary vs Net Salary: Meaning, Differences & Calculation Explained

Most salaried employees in India focus only on the ‘salary in hand’. What most people do not know is that the amount credited to you is not always what is written in your offer letter. To understand your payslip correctly, you must understand the differences between gross salary vs net salary. 

In this detailed guide, you will learn what is gross salary, what is net salary and how they affect your pay.

What is Gross Salary?

Gross salary is the total sum a company pays you before making any deductions. It generally contains your basic income as well as additions: 

• House Rent Allowance (HRA) 
• Medical Covers 
• Subsidised Meals or Meal Coupons
• Free Car Services
• Telephone Allowance
• Concessional Loans

Additional contributions affecting your gross salary also include your Provident Fund (PF). 

In other words, the full gross compensation contains: 

• Direct benefits
• Indirect perks
• Savings-related contributions

When a corporation offers you a position at a given salary, that's a gross salary.

What is Net Salary?

Net Salary is the amount that is credited to an employee’s bank account every month. The amount is the wage to be paid by a firm after deductions such as: 

• EPF
• Professional Tax
• Income Tax
• ESI
• Additional Deductions

Professional tax and ESI are not applicable to all organisations and vary by state.

You should always know the difference between gross salary vs net salary. It is useful for understanding the true cost of employment and managing compensation packages efficiently. 

Gross Salary vs Net Salary: Comparison Table

Let us take a look at the gross pay vs net pay comparison:

Components of Gross Salary

While learning gross monthly salary meaning, you must know all of its components:

• Basic Salary: This is the fixed sum provided directly to employees. It does not contain any incentives, bonuses, benefits, or any other kind of remuneration from your employer.
• Gratuity: Gratuity is a part of the compensation paid by the employer as recognition of the services of the employee in the company. Gratuity is provided to an employee at the time of retirement. It may also be provided when the employee quits the company. However, gratuity is offered by your employer only after you have completed five years of service in the organisation. This is taxable as ‘Salary’ income.
• HRA: HRA stands for House Rent Allowance. It is a type of compensation paid to assist employees with their housing expenses. HRA is available for salaried individuals as well as self-employed persons.
• Wage Arrears: Salary arrears refer to the unpaid difference that is owed to you when a salary increase is applied from a past date. For example, if you got a raise in January, but the raise has been made effective from July, then you are eligible to get the arrears for the last six months of the same year.
• Perquisites: Perquisites refer to the fringe benefits provided to employees in addition to the wages.
• Pension: Pension is a fixed payment paid to employees on retirement from a job on a monthly basis. It is paid either by the company or the government.

Deductions Included in Net Salary

There are certain deductions that are included in the net pay salary. They are:

How to Calculate Gross Salary & Net Salary

Your gross and net income is calculated based on your contract and type of employment. The formula for the, are:

CTC (total package)= Basic Salary + Allowance + Perks + Employer PF Contribution + Bonus.

• Gross Salary = Basic Salary + Allowance + Bonus(if monthly).
• Deductions: PF + Professional Tax + TDS(Income Tax) + Other deductions.
• Net Salary = Gross Salary - Deductions.

Final formula:

Net Salary (In- Hand) = CTC - (Employer Contributions not in-hand + Taxes +Other Deductions)

Example of Gross Salary Calculator

Here is an example of a gross pay calculator to help you understand the components of your salary and how they affect you:

How to Use Salary Calculators

Here’s the step-by-step process to use a salary calculator with a gross salary example:

Step 1: First, enter the CTC that you earn.

Step 2: Enter any bonuses that are included in the CTC as a percentage or amount.

Step 3: If you have any deductions, fill them out. 

Step 4: The  Salary Calculator will show you the performance bonus and the gross to net salary. 

Gross Salary vs CTC

In order to fully understand your salary slip, you must be aware of what is gross annual income vs your CTC. 

Gross salary is the total amount of money an employee earns before any deductions and taxes. The CTC or Cost To Company refers to the overall amount of money that a company spends on an employee. This includes the wages and any additional benefits you may be getting. The CTC also contains all the bonuses and incentives that an employee is entitled to. The gross compensation is just your basic wage. 

The key differences between gross Salary and CTC are:

Which Salary Matters for Personal Loan Approval?

For a personal loan, your total gross income and net earnings are both important. However, the latter is more important for loan approval. Here’s how lenders use both wages:

• Gross Salary (or CTC): This number is used by lenders to judge your complete financial position. They also determine your eligibility based on your CTC. If this amount is good, you may get lower interest rates and higher loan amounts.
• Net Salary: This is the money that actually comes into your bank account. This amount is closely evaluated by lenders to determine your fixed obligation-to-income ratio (FOIR). Most banks will expect your suggested EMI to be 30% to 50% of your net monthly income. 

Conclusion

As a salary employee, it is very essential that you know what your payslip states. This is why it is important for you to know gross earnings vs net differences. The gross pay is what an employee earns before any deductions are taken off. Net Salary is the amount that is received after making all applicable deductions.

Knowing the difference between gross income vs net income improves your financial literacy and helps you make informed decisions. If you want to apply for personal loan, business loan or other financial products, understanding your wage structure might go a long way. 

If you are looking for a personal loan, My Mudra will help you navigate the entire process. You can check your eligibility with over 70+ top lenders in India and compare multiple offers. My Mudra also makes it easier for borrowers to receive customised financing solutions through a simplified application procedure. You can also use our online EMI calculator to create a repayment plan according to your financial situation. 

Also Read: What is Gross Salary? Meaning, Components & Calculation Guide