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How To Calculate Gross Pay for Employees?

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How To Calculate Gross Pay for Employees?

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Gross pay is the total amount of money an employee earns before taxes and other deductions are taken out. To calculate gross pay, you will need to know the employee's hourly wage or salary, as well as the number of hours they worked (for hourly employees) or their annual salary (for salaried employees).Once you have this information, you can use the following formula to calculate gross pay:

Gross pay = (Hourly wage x Number of hours worked) or (Annual salary)

It is important to note that for salaried employees, you would need to divide the annual salary by the number of pay periods in a year to get the gross pay for that pay period.

Important Salary Terms

  • CTC – CTC stands for cost-to-the-company. It denotes the overall cost of the employee including the various components paid directly to the employee, like basic pay, allowances, overtime, bonus, etc. It also includes the indirect benefits provided to the employee in the form of medical or health insurance, meal vouchers, and additional reimbursements for mobile phone or internet connections. Furthermore, since CTC gives you the total cost of the employee, it also factors in all the required deductions such as the income tax and your contribution to the employee’s provident fund.

Knowing the CTC is important for you as it helps you get an accurate cost of each employee working in your organisation and allows you to accurately project your bottom line financial figures.

  • Gross Salary – The gross salary is a subset of the CTC. In fact, it includes all those components of the CTC that are paid to the employee directly or indirectly. These can be fixed components such as basic or HRA (paid on a monthly basis), or variable components such as an annual performance bonus. So, in other words, you can say that gross salary is the CTC minus the deductions.

Knowing the gross salary helps you structure your salary components better. Since it is the sum of all payments made to the employees, it can help create the right balance of the salary components and also customise the payslip for employees working in different geographies.

  • Net salary – The net salary is what the employee actually gets in their account each month. It can be described as the gross salary but after the various tax deductions and contributions to the retirement pool of the employee (provident fund, gratuity, pension scheme, etc.).

While you might feel that you’re offering a high gross salary to your employees, if their net salary is low, it is natural for them to feel demotivated. Knowing the net salary can help you create incentive plans or restructure their salary as a means to revitalise their spirits.

How to calculate gross salary formula?

Here is the formula to calculate gross salary from the monthly payslip.

Gross salary = sum of all fixed, variable, direct and indirect salary components that are paid to the employee.

Typically, on your payslip the gross salary components are listed on the left hand side column. 

The common salary components include:

  • Basic pay – fixed and entirely taxable, the basic pay constitutes the main portion of the gross salary
  • Allowances – several types of allowances can be offered to the employees such as HRA or House Rent Allowance, conveyance allowance, medical allowance, entertainment allowance, special allowance, etc. Some of these, such as the HRA are tax-exempted and can help increase the net salary of the employee.
  • Benefits – another way to make the salary lucrative for your employees is by offering perks or benefits. These could be direct or indirect benefits and appear in the form of meal vouchers, insurance premiums made on behalf of the employee, subscriptions to gyms or clubs, etc. Before offering benefits, do check their tax liability for you, as the employer.
  • Bonus or incentives – Many employers also offer incentives or a bonus to boost employee performance. This is often a variable component and is usually paid annually.

Formula to calculate gross salary

If you are wondering how to calculate the gross salary using the CTC, then that is fairly straightforward as well, using the formula

Gross salary = CTC - (income tax deductions + retiral contributions)

Simply add the tax deductions (income and professional tax) and all contributions to the employee’s retirement savings (provident fund, gratuity, pension plan, superannuation, etc.). Now subtract the result from the overall CTC to get the gross annual salary for the employee. Divide the result by 12 to get the monthly gross.

Frequently Asked Questions

1. What is annual gross income?

Annual gross income or the annual gross salary is the sum of all the amounts an employee is entitled to and was paid during the period. The gross salary includes fixed, direct components such as basic pay, and allowances like HRA. Variable elements such as bonuses and incentives are a part of the gross salary too. It also includes indirect benefits such as vouchers, perks, and other reimbursements.

The annual gross income can also be expressed as the CTC minus tax deductions and retirement contributions made by the employer.

2. What is total gross income?

Total gross income can be used as a broader term to include the gross annual salary and income from other sources such as house or shop rent, earnings from fixed deposits, mutual funds, or the stock market, etc. The gross income is expressed after deducting all the expenses and exemptions.

For example, in the case of gross salary, the deductions include taxes and contributions made to the retirement fund like provident fund, pension plan, etc.

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