Net salary is the ‘take home’ salary of an employee after statutory deductions such as taxes are made from the gross salary. Net salary is the amount an employee receives after the statutory deductions. Net Salary is the actual amount which is credited to the bank account of an employee. Income Tax is based on the Gross Pay of an employee.
What’s the Difference between Gross Salary and Net Salary?
CTC or cost to company = Gross Salary+PF+ESIC+Leave Pay+Gratuity. Gross salary includes both taxable and nontaxable income. It is, therefore, the sum of components prior to deductions.
Gross salary may include the following:-
- Basic Salary
- Dearness Allowance
- House Rent Allowance
- Conveyance Allowance
- Medical Reimbursement Allowance
- City Compensatory Allowance
- Performance Incentives
- Leave Travel Allowance
- Food Allowance
- Any Other Allowance depending upon the company
Certain deductions are made from your salary as listed below:
- Employee PF Contribution of 12%
- Employee ESIC Contribution
- Professional Tax (state-specific)
- Income Tax
When the aforementioned deductions are made from the Gross Salary, the remaining amount is known as Net Salary. It is the take home salary of the employee.
Net Salary = Basic + Additions (bonuses, allowances) – Deductions.
How to Calculate Net Salary?
Employees can calculate their net salaries using a calculator, spreadsheet, or a pencil and paper. The formula, as it were for calculating net pay is = gross pay – deductions.
- If you calculate your net salary with the help of Excel (2003 / 2007) file, you must first create a database comprising your basic salary.
- You should calculate home rent allowance, dearness allowance and medial allowance. The gross salary will then be calculated as equal to Basic + HRA + DA + MA with the formula =SUM(D2:G2).
- You should then calculate the annual salary as salary paid per month * 12, the formula being =J2*12.
- The net salary can then be calculated as annual salary – income tax and apply the formula =M2-M2. The following are the steps included in the calculation of net salary.
Net Salary Calculator:
You can calculate your net salary by using several calculators available online. You will have to enter specific details to get your net salary amount. However, you must have a clear picture of the different components of your salary and how they are calculated to arrive at your net salary as listed below:
Gross Salary:
You should first calculate your Gross Salary by subtracting the Employer’s contribution Provident Fund contribution(EPF) and Gratuity from Cost to Company (CTC).
Gross Salary = Cost to Company(CTC) -Employer’s PF Contribution(EPF) – Gratuity.
Taxable Income:
You should calculate your taxable income by subtracting your Leave Travel Allowance(LTA), Conveyance Allowance, House Rent Allowance(HRA), Medical Insurance, Professional Tax and Tax Saving Investments, if any.
Taxable Income = Gross Salary – Employee’s PF Contribution(PF) – Conveyance Allowance – HRA – LTA – Medical Bills – Medical Insurance – Tax.
Income Tax:
You should calculate your income tax by checking the income tax slabs and rates (2% educational cess).
Take Home Salary/Net Salary:
Take home salary or net salary is obtained by subtracting the Income Tax, Provident Fund (PF) and Professional Tax from the Gross Salary.
Take Home Salary = Gross Salary – Income Tax – Employee’s PF Contribution(PF) – Professional Tax.
Employees should note that if their variable pay is paid quarterly, their take home will differ in the months the variable pay is paid. As the name suggests, variable pay differs based on several factors. The CTC includes variable pay.
Below is a table showing how to calculate net salary:
Salary Component Amount Taxable Amount Basic salary 2,20,000 2,20,000 House rent allowance 60,000 36,000 Conveyance allowance 8000 0 Medical Reimbursements 9000 0 Gross salary 2,97,000 2,56,000 Medical insurance 2500 PF (12% of basic salary) 26,400 Benefit 28,900 CTC (benefit + gross salary) 3,25,900 Below is a break-up of take home salary:
Deductions Amount Tax (10% of taxable amount) 25,600 Employee provident fund (12% of basic salary) 26,400 Professional tax 2500 Total deduction 54,500 Gross salary 2,97,000 Net salary 2,42,500
