What is Gross Salary – Know How to Calculate Gross Salary or CTC

Gross salary is the aggregate amount of compensation paid by an employer or company towards the employment of an employee. Gross salary is the total amount of money your employer pays you before any deductions are made. It's essentially the raw number before taxes, provident fund contributions, and other social security payments are taken out. Think of it as the entire financial package your company offers you in exchange for your services. The aggregate compensation would be the Cost to Company or CTC. An employee’s take-home pay would differ from the CTC. The employees’ CTC is the gross amount, while the amount of salary one gets to take home is the net salary. In simpler words, gross salary is the monthly or yearly salary before any deductions are made from it.

Gross Salary (CTC) vs Take-Home Salary

CTC (Cost to Company) is a broader term that includes the total amount your employer spends on you. CTC includes components like your gross salary, employer's provident fund (EPF) contributions, gratuity, bonuses, and other benefits like health insurance, food coupons, etc.

However, CTC is not the same as the money you actually take home. Remember, deductions such as provident fund, professional tax, insurance etc. will be made from your gross salary to arrive at your net salary, which is what you actually receive in your bank account.

Various Components of Gross Salary

Direct benefits

• Basic salary
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Telephone or mobile phone allowance
• Vehicle allowance
• Special allowances
• Leave Salary or Leave Encashment

Indirect benefits

• Performance-linked incentives or bonus
• Overtime payments
• Accommodation provided by the employer
• Utility bills such as electricity and water are paid by the employer
• Arrears of salary
• Meal coupons

Understanding Components of Gross Salary

Basic Salary: Basic salary refers to that portion of the CTC of an employee that excludes all allowances and perquisites paid to an employee. The basic salary is not subject to any deductions or qualifies for any exemptions. Almost always, an individual’s basic salary is lower than the take-home salary or gross salary. 

Perquisites: Perquisites are benefits provided to an employee in addition to the basic salary and specific allowances. These can be termed as benefits received by an employee as a direct result of his/her stature in an organisation. These perquisites are monetary or non-monetary benefits payable in addition to the salary and allowances to an employee. 

Salary Arrears: An employee becomes entitled to arrears due to the increment in the salary. Arrears can be defined as an amount paid to an employee as a result of an increment or hike to their salary.

House Rent Allowance: An employer generally grants an employee a house rent allowance or HRA to cover the cost of accommodation. The HRA received by an employee can be used to pay the rent of residential accommodation at the place of work.

Leave Salary or Leave Encashment: Generally, employees are allowed to take leave during the period of service. Employee may avail such leave or in case the leave is not availed, then the leave may either lapse or be accumulated for future or allowed to be encashed every year or at the time of termination/ retirement. The payment received on account of encashment of unavailed leave would form part of the salary. However, section 10(10AA) provides an exemption in respect of the amount received by way of encashment of unutilised earned leave by an employee at the time of his retirement, whether on superannuation or otherwise.

Other Benefits Provided by an Employer

Certain expenses an employer incurs to ensure the welfare of the employees in the organisation are not included in an employee's CTC.

Examples of such components are:

• Snacks, beverages, and other refreshments are provided by the employer during office hours.
• Reimbursement of expenses incurred by the employee on travel and food during official/business tours.

How to Calculate Gross Salary and Net Salary?

To understand the calculation of gross salary and net salary better, let us take the help of an example:

Arun works at an IT firm. His gross salary per annum is Rs 6,20,000 while his net take-home is just Rs 5,93,000.

Let’s take a look at his salary components:

Calculation of Cost to Company to Take-home Salary

The salary calculations involve multiple components, so you need different formulas to calculate each aspect of your salary. Here are the most important formulas you must understand:

Gross salary: CTC – Employer PF – Gratuity Provision
Take-home Salary (Net Salary Post Taxes): Gross Salary – Income Tax – EPF Contribution – Professional Tax - Health insurance

Calculations making your life difficult?  Don't worry. Try our take-home salary calculator.

Related Articles

1. Calculating in-hand salary from CTC
2. What is Basic Salary?