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How to Calculate Annual Salary?

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Created on
January 30, 2023


What’s Inside

Knowing how to calculate your annual compensation is a big part of adulting. Where to spend, when to borrow, and being financially independent are directly dependant on your annual income. 

So, let’s have a deeper look at this , and figure out how to calculate your salary per annum

The different classifications of annual salary

One of the vital aspects to keep in mind is that annual salary is expressed in different forms serving various purposes. The 3 principal ones are:

  • CTC – CTC stands for ‘cost to the company’. This represents the annual cost incurred by the employer for your services. CTC contains all the amounts that are paid to you directly, indirect benefits, and the tax deductions or retirement contributions that are made on your behalf. 
  • Gross Salary – The annual gross salary is expressed as the CTC minus the deductions (like tax or provident fund). It includes the fixed components such as basic pay or HRA, and variable components such as bonuses or incentives that may not be paid out on a monthly basis. The gross salary also determines your annual tax liability.
  • Net Salary – The annual net salary depicts your cash inflow per annum. Net salary is arrived at by subtracting all tax deductions (TDS) from your gross salary. This is the final amount that is deposited in your account. It is also known as take-home salary or in-hand salary. 

The components of annual compensation

There is no fixed rule or format that dictates what a salary structure should be like. However, the most commonly observed salary components include:

  1. Basic pay – The basic salary accounts for roughly 40 – 50% of a person's annual salary. The amount is often influenced by elements such as education, training, certifications, work experience, role, designation, etc.
  2. House Rent Allowance (HRA)HRA is a benefit for employees stayed in rented accommodation. This component comes with a tax exemption upon the furnishing of the relevant proofs and rent receipts. HRA is set as a percentage of the basic and is usually 40% of the basic in non-metro cities or 50% of the basic in metro cities.
  3. Leave Travel Allowance (LTA) –  Another allowance that can provide some tax relief is known as LTA. The employer provides this benefit against an employee's (plus family) travel costs.
  4. Conveyance Allowance – Commonly offered by large companies (and for people living in metro cities), the conveyance allowance helps in managing the costs of the daily commutes to and from work.
  5. Special Allowances – Apart from the aforementioned, companies can choose to offer other allowances such as dearness allowance (DA), internet reimbursement, entertainment allowance, etc.
  6. Bonuses – Many employers include bonuses or performance incentives as a form of employee retention and motivation. This falls under the variable component of the annual salary.
  7. Provident Fund and Gratuity – This amount is deducted from your gross salary and deposited with the Employee Provident Fund Organisation as part of your retirement benefits. PF contributions are tax exempted under Section 80C of the Income Tax Act. You can choose to increase your individual contribution through the voluntary provident fund option (VPF).

Calculating Annual Income

  1. List all sources of income for a full year, including salary, interest payments, and capital gains.
  2. Total up your yearly income by adding up all your sources of income.
  3. If you receive monthly income, estimate your annual income by multiplying your monthly income by 12.
  4. Calculate your annual income by adding your yearly and estimated monthly income together.

Calculating Net Annual Income

  1. Determine your gross annual income by adding all sources of income.
  2. Subtract deductions, such as professional or corporate tax and contributions to Public Provident Fund (PPF), from your gross income to find your taxable income.
  3. Deduct the income tax according to the tax slab under which your income falls.
  4. Your net annual income is your taxable income minus income tax.

Example for Calculating the Annual Salary

  • Let's say you earn a yearly salary of ₹8,50,000 and earn ₹2,00,000 per year as a freelance technical writer.
  • You also earned ₹2,00,000 from an online case study competition and ₹10,000 in interest payments from the bank.
  • You pay ₹200 per month in professional tax and contribute ₹3,500 per month to PPF.

Here's how to calculate your gross and net annual income:

Yearly income 


+ Freelance income per year


+ One-time earning from quiz show


+ Yearly earnings from interest payments 


= Gross annual income


- Professional tax per year (₹200 x 12)


- PPF contribution per year (₹3,500 x 12) 


= Taxable income


- Income tax (20% of ₹11,23,200) 


= Net annual income


Summing it up

Calculating your annual salary can be done by adding up the total amount of money you earn in a year, including your base salary, bonuses, commissions, and any other forms of compensation. It's important to note that your annual salary may also be affected by deductions such as taxes and insurance, so it's important to take those into account when calculating your salary.

Frequently Asked Questions

1. How do you calculate monthly salary from yearly?

To calculate your monthly salary from your yearly salary in India, you can simply divide your yearly salary by 12. This gives you the amount you earn per month before taxes and other deductions. For example, if your yearly salary is INR 6,00,000, your monthly salary would be INR 50,000 (INR 6,00,000 divided by 12). Keep in mind that this calculation assumes that your salary remains the same throughout the year and doesn’t take into account any bonuses, salary increases, or other forms of compensation. Additionally, it's important to consider any deductions that may be made from your salary such as taxes, EPF, and other benefits before arriving at your take home pay.

2. What is an example of annual salary?

Although there is no prescribed format that employers follow to express the annual salary, here is an example of annual CTC salary that captures the essential salary components within it.

3. What is the total annual compensation?

The total annual compensation refers to the total amount of money an individual receives from their employer in a given year. It typically includes the base salary, bonuses, commissions, incentives, benefits, and any other forms of compensation. The specific amount varies depending on factors such as the individual's job role, experience, industry, and company policies. It's important to note that compensation can vary widely among individuals and is subject to negotiation, performance, and other factors.

4. How do you calculate annual gross compensation?

To calculate annual gross compensation:

  1. Start with the base salary: Determine the fixed amount paid to the individual annually.
  2. Add bonuses and commissions: Include any additional earnings based on performance or sales targets.
  3. Include benefits: Account for the value of benefits such as health insurance, retirement contributions, and stock options.
  4. Sum it all up: Add the base salary, bonuses, commissions, and the value of benefits to obtain the annual gross compensation.

5. What is CTC or annual compensation?

CTC stands for "Cost to Company" and refers to the total annual compensation or the total cost incurred by a company in employing an individual, including their salary, benefits, bonuses, incentives, and other perks.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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