Joining the vast and competitive Indian workforce is no small achievement. It is the first step towards some serious adulting. Surprisingly, though, many do not fully comprehend the meaning of gross salary. That changes now.
From an employer's perspective, you provide services for which you need to be paid based on your role, experience, expertise, and qualifications. This is a cost borne by the employer and is known as 'cost to the company' or CTC. This is a fixed annual amount for a specific period (usually the entire financial year).
Gross salary takes into account all the various components paid to you directly or indirectly and includes any deductions that may occur on your behalf. These deductions, like gratuity and PF, are usually mandated by the central or state governments, depending on the nature of your work.
Let's break down your CTC to understand the meaning of gross salary and why it differs from your net in-hand salary.
The basic salary is the most important component of your CTC. In fact, a few other components are directly derived as a percentage of the basic salary. The basic salary often constitutes around 35 - 45% of your gross salary. This is the reason why most salary negotiations happen over basic pay, as it is fixed and influences some of the other allowances that are paid out.
This is a wide umbrella and can comprise various sub-components per your employer's policies and payroll structure. Some of the common types of allowances are:
All employees that are living in rented accommodation are allowed to receive HRA. This helps you save on your annual income tax outgo. HRA can be calculated differently based on certain scenarios and usually falls under the following three buckets:
This allowance is paid on the submission of air or rail tickets for a trip taken in the specified period. It allows you to save tax as per the cap provided in your CTC. LTA exemption can only be claimed for two trips in a block of four years.
This is a common component of the gross salary for people living in metro cities and allows you to save tax to the extent of ₹19,200 per annum, which translates to ₹1,600 per month.
Medical allowance is paid out to cover the cost of health checks, medicine, and other medical expenditures. It is entirely exempt from tax up to the limit of ₹15,000 per annum, which translates to ₹1,250 per month.
Employers offer it intending to offset the effects of rising inflation. Unless you work in a public-sector or quasi-public-sector enterprise, it is unlikely that this component will appear in your CTC.
Now let's take a look at some of the commonly paid-out indirect components of gross salary.
It is an optional salary component that may be paid upon achieving a milestone, like completing one year of service, or on a fixed occasion each year, such as a Diwali bonus.
These incentives could be based on specific targets or some overall performance evaluation criteria. Many organisations also include a certain weightage of the company's annual performance as a criterion for calculating this component.
Quite popular among European MNCs, working beyond normal office hours or on holidays qualifies you for additional overtime (OT) or holiday payout. There is no fixed rule to calculate this amount, which varies among companies.
As an appreciation of your long duration of service, companies are required to pay gratuity to their current or retiring employees. Five years is the fixed term for becoming eligible to receive gratuity payment that is entirely tax-free.
There are a few other components of your salary that are not paid to you but deducted and paid on your behalf to the relevant authorities. Let us take a look at the most prominent deductions.
EPF acts as your retirement fund, to which the contribution is deducted from your salary. This is usually done at the rate of 12% of your basic salary. The employer also contributes an equivalent amount to your PF account that benefits from a fixed annual interest rate as declared by the government during each national budget.
Apart from the tax deducted at source (TDS) as mandated by the Income Tax Act of India, a state-specific tax known as professional tax may also be levied depending on your role and nature of work. While the income tax needs to be paid as per the individual tax slab you fall under, the professional tax has a cap of ₹2,500 per annum.
Now that you understand the meaning of gross salary and all that it entails, let's understand why the actual monthly salary differs from the gross salary on your offer letter.
Your net monthly salary is your gross salary minus the deductibles such as EPF, gratuity contributions, and taxes. This is why it is usually lower than the monthly gross salary.
To calculate your gross salary, you can add all the various direct and indirect salary components that are paid and subtract the contributions made on your behalf under the headers of employee provident fund, employee pension scheme, and gratuity.
CTC stands for the cost to the company and is a collection of all the amounts that are paid to you for your services directly or indirectly. It also includes taxes or provident fund contributions and other forms of retirement benefits like employee pension schemes (EPS). While many companies use the same definition for CTC and gross salary, typically, the meaning of monthly gross salary is your monthly CTC minus monthly EPF, EPS, and gratuity contributions.
