Gross Pay vs Net Pay: What's the Difference?
In personal finance, there are two major concepts that are often discussed, but that leaves many confused. Even though both are important components of your overall pay, each serves a different function and represents distinct portions of your salary.
In this blog, we will explore the difference between gross salary vs net salary and discuss ways to calculate the two. Read along to gain further insights into the two concepts.
What is Gross Pay
Gross Pay, also known as Gross Salary, is the salary that an employee earns before any mandatory or voluntary deductions are made from it.
Examples of mandatory or voluntary deductions are professional tax, contributions to employees’ provident fund (EPF), and any other payroll deduction.
There are several components to Gross Salary. These are as follows:
- Basic Salary
- Gratuity
- House Rent Allowance
- Other Allowances
How to Calculate Gross Pay
The calculation of gross pay is quite simple. However, the procedure could differ a little based on whether you are a salaried employee or an hourly employee.
Here is how you can calculate both:
-
For Salaried Employees
Here's how you can calculate your gross salary:
|
Salary Components |
Sample Figures (Rs) |
|
Basic Salary |
25,000 |
|
9,000 |
|
|
1,300 |
|
|
1,600 |
|
|
Entertainment Allowance |
1,500 |
Gross salary = Basic salary + All kinds of allowances
Gross salary = Rs 25,000 + Rs 9,000 + Rs 1,300 + Rs 1,600 + Rs 1,500
Total gross salary = Rs 38,400
-
For Hourly Employees
For an employee receiving hourly wages, simply multiply the hourly wage by the total number of hours worked in a particular period of time (month or week), i.e., Hourly Wage x No. of hours worked in a month/week.
For example, if you earn Rs 200 per hour and work 190 hours a month, your gross monthly pay would be calculated as Rs 200 multiplied by 190 (Rs 200 x 190 hours), which adds up to Rs 38,000.
What is Net Pay
Net Pay, also known as Net Salary, is the salary you receive after subtracting all mandatory or voluntary deductions.
In other words, it is the amount of income received after the deduction of TDS, professional tax, and employee and employer contributions towards EPF from the gross pay. Hence, net pay is always lower than gross pay/salary.
How to Calculate Net Pay
The computation of net salary is quite simple, as shown below:
|
Salary Components |
Sample Figures (Rs) |
|
Gross Salary |
38,400 |
|
TDS |
450 |
|
Professional Tax |
230 |
|
Contribution towards EPF |
3,400 |
|
Insurance Premium |
980 |
Net Salary = Gross Salary – TDS - Professional Tax – EPF Contribution – Insurance Premium
Net Salary = Rs 38,400 - Rs 450 - Rs 230 - Rs 3,400 - Rs 980 = Rs 33,340
Difference Between Gross and Net Salary
Listed below are some of the key difference between gross and net salary, presented in tabular format:
|
Points of Difference Between Gross vs Net Salary |
Gross Salary |
Net Salary |
|
Meaning |
It is the amount earned by an employee before subtracting any mandatory or voluntary deductions. |
It is the amount that an employee receives in hand after making mandatory or voluntary deductions, such as professional tax, EPF contribution, TDS, etc. |
|
Components |
It includes house rent allowance (HRA), medical allowance, travel allowance, or any other kind of allowance. |
Professional tax, contribution towards provident fund and pension, etc., are subtracted from the gross salary. |
|
Amount |
The gross salary is the maximum amount, which includes all the deductibles. |
The amount is comparatively lower since several deductions are made from the gross salary to arrive at the net pay/salary. |
|
Formula |
Gross salary = Basic salary + HRA + Other Allowances |
Net Salary = Gross Salary - Professional Tax - EPF |
Summing Up Gross and Net Salary Difference
To sum up, gross pay/salary is the amount earned by an employee before any voluntary or mandatory deductibles are subtracted from it. The net salary, also known as the take-home salary, is the amount that is arrived at after subtracting various deductibles like professional tax, EPF, TDS, etc., from the gross pay.
Understanding the difference between gross vs net salary not only enhances financial literacy but also allows you to make informed decisions.