Enterprises met out salaries to their employees as a form of payment for their services. They are offered an aggregate compensation as their salary. However, there exists a difference between this gross salary and an employee’s take-home salary.
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What is Gross Salary?
It signifies the amount paid out to an individual before any voluntary or mandatory deductions are made from it. Therefore, it is the total pay that an employee receives before taxes and other deductions. Gross salary includes income from all sources and is not confined to only the income received in cash. Therefore, it also includes benefits or services received by an employee. On the other hand, the salary that an employee takes home is the net salary after deductions.
Components of Gross Salary
The components of a gross salary include several benefits, some of which are elaborated below:
- Basic salary: It is the fixed sum paid out directly to an employee. It is not inclusive of bonuses, incentives, benefits or any such perks from an employer.
- House rent allowance or HRA: It is a salary component that covers the housing expenses of employees.
- Employee contribution to the Provident Fund (PF): Both an employer and an employee contribute 12% of the employee’s basic salary to the Employment Provident Fund or EPF every month.
- Perquisites: These are the benefits offered to an employee on top of the basic salary and specific allowances. Perquisites can be monetary or non-monetary, and made out as an emolument to employees in an organisation.
- Special arrears: Arrears, in terms of salary, is the sum paid to an individual on account of an increment or hike in his/her salary.
- Special allowance: It includes additional allowances extended by an employer to an employee, such as transport allowance, conveyance allowance, outstation allowance, etc.
- Bonus: An employee may receive a bonus as an incentive-based on performance.
- Professional tax: State governments levy a professional tax on the gross salary. In India, a state can charge up to Rs. 2,500 as professional tax in a financial year.
Gross Salary Calculation
Gross salary is calculated by adding an employee’s basic salary and allowances prior to making deductions, including taxes. Here, a basic salary is the base income of an employee or the fixed part of one’s compensation package.
Gross salary calculation can be initiated with the help of this mathematical formula:
Gross salary = Basic salary + HRA + Other Allowances
For example, given below is the salary structure of an employee:
|Basic Salary||Rs. 20,000|
|House Rent Allowance||Rs. 9,287|
|Transport Allowance||Rs. 1200|
|Provident Fund||Rs. 2500|
|Statutory Bonus||Rs. 1650|
|Income Tax||Rs. 2000|
The gross salary can be calculated as below:
Gross salary = Basic Salary + HRA + Other Allowances
Gross salary = Rs. 20,000 + Rs. 9,287 + Rs. 1200 + Rs. 1650
Gross salary = Rs. 32,137
Provident Fund is not taken into account while deriving the gross salary. Additionally, as gross salary is given by the gross annual income before any deductions, it remains unaffected by the amount of income tax.
Difference between Gross Salary and Basic Salary
|Gross Salary||Basic Salary|
|It is the monthly or yearly salary paid to an employee without any tax deductions.||It is the salary paid to an employee before any fringe benefits are added to it.|
|Gross salary is inclusive of bonuses, overtime pay, allowances and other differentials.||Basic salary is the core of the salary received by an employee.|
Difference between Gross Salary and Net Salary
|Gross Salary||Net Salary|
|Gross salary is the amount received by an employee without any tax deductions.||Net salary is the amount that an individual receives after all deductions have been taken out.|
|Gross salary = Basic salary + HRA + Other allowances||Net salary = Gross salary – Income tax – Provident Fund – Professional tax|
Reporting Salary on Taxes
As per the Income Tax Act, 1961, there exist two kinds of taxes in India:
- Direct Tax: It is borne and paid directly by a taxpayer to the government. It includes wealth tax, gift tax, income tax, etc.
- Indirect Tax: An individual pays this tax to the government through an intermediary. The Government of India introduced the GST Act as an all-encompassing indirect tax.
Therefore, an income tax is a direct tax levied by the government to an individual. The Income Tax Act levies taxes on multiple heads of income, one of which is income from salaries. It includes the taxable income that employees receive from their employers.
On February 1st, 2020, the Finance Minister of India announced a new regime for income tax. However, this new regime is optional and co-exists with the previous income tax slab in place. Salaried employees can, therefore, opt for the new regime or file their taxes as per the old regime.
Income tax rates and slabs for FY 2020-21 are as below:
|Income tax slab||Rate of tax||Cess|
|Up to Rs. 2,50,000||Nil||Nil|
|From Rs. 2,50,001 to Rs. 5,00,000||5%||4%|
|From Rs. 5,00,0001 to Rs. 7,50,000||10%||4%|
|From Rs. 7,50,0001 to RS. 10,00,000||15%||4%|
|From Rs. 10,00,001 to Rs. 12,50,000||20%||4%|
|From Rs. 12,50,001 to Rs. 15,00,000||25%||4%|
|More than Rs. 15,00,001||30%||4%|
Sections 80C and 80D are the most extensively used options for saving income taxes by salaried employees. Individuals who invest in stipulated tax-saving instruments can claim up to Rs. 1,50,000 for tax deductions.
Some of these tax-saving avenues under Section 80C are the following:
- Life insurance premium
- Employee Provident Fund (PF)
- Contribution to PPF account
- Annuity or Pension schemes
- Fixed deposits
- Children’s Tuition fee
- National Saving Certificate (NSC)
- Equity Linked Savings Scheme (ELSS)
Section 80D allows taxpayers to claim deductions on medical expenses. A salaried employee can save tax on medical insurance premiums paid for self, dependents or family. Employers may pay this health insurance premium on behalf of the employees, and this amount is then deducted from their gross salary. This premium is also eligible for deduction under Section 80D.
The Indian taxation system establishes income tax as an inevitable imposition on the citizens for the purpose of raising funds. The revenue, thus generated, is then utilised towards economic development and reinforcing the national security of India.