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How To Calculate Gross Pay for Employers

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How To Calculate Gross Pay for Employers

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Hiring in this competitive market is not an easy task. Apart from the role and career opportunities that you can provide, attracting top talent requires offering a lucrative remuneration. Through this article, we will show you how to calculate gross salary and some of the key salary components that it comprises. With this information, you will be able to create a salary structure that is motivating for your employees while being cost-effective for your company.

What is Gross Salary?

The sum of all the elements that make up an employee's compensation package is known as their gross salary. It displays their earnings prior to any deductions (required and optional), like income tax, provident fund, gratuity, etc.

As the employer, you are required to include a breakdown of all the parts that make up the gross salary. This is provided to the employees in the form of monthly payslips. You are also mandated to deduct tax at source (wherever applicable) for your employees and deposit it with the Income Tax department. While the final amount that an employee receives after all such deductions is known as the net salary, all the costs you bear as an employer are known as CTC (cost to the company).


You must have come across these terms earlier as well. Net salary is an important factor for employees to assess their in-hand monthly income and helps them make apt financial decisions. The CTC helps you, the employer, to take stock of the overall expense of hiring and paying an employee, a vital consideration while preparing your hiring budgets. An ideal combination needs to be achieved here, as high CTC with low in-hand salary will discourage your employees. Here are some of the popular salary heads used by employers.

How to calculate gross salary from CTC?

As mentioned earlier, the CTC is always higher as it also takes into account other expenses that are not mentioned in the gross salary. This is why, as an employer, a CTC is a more accurate view of the cost of the employee. However, if you need to know the gross salary of the employee you can calculate that using the CTC. Here's how.

Gross salary: CTC – EPF – Gratuity (and other retiral deductions)

Key components of gross salary


Basic salary is a fixed component that is guaranteed to be paid to the employee. This is the largest chunk of the gross salary and is entirely taxable as per the law of the land.

House Rent Allowance (HRA)

HRA is offered to employees staying in rented accommodations. The amount is usually higher in metro cities and comes with tax benefits.

Conveyance Allowance

Another commonly found allowance in metros is the conveyance allowance to help people manage the expenses related to their daily office commute.

Medical Allowance

Medical allowance is offered to cover medical and health check-up expenses for the year. 

Leave Travel Allowance (LTA)

Like HRA, LTA is one of the tax-exempted benefits offered to employees based on their pay grade.

Special Allowances or Perquisites

Entertainment, fuel, and meal allowances are some of the other benefits that companies offer based on the nature of the job. 


One of the tools companies use to motivate their employees is by offering bonuses or performance-linked incentives. There is no set rule for this and it can be offered as a variable with a pre-decided payout frequency.

While these are the components of gross salary, the CTC is actually much higher. This is because gross salary does not include the deductions such as income taxes or contributions made to the retirement fund of employees. Gross salary is calculated by adding all the paid components such as basic, allowances, direct benefits, indirect benefits, bonuses, etc.

Frequently asked questions

What is gross pay?

Gross pay is the subset of CTC and is the sum of all components that are paid to an employee. This includes fixed components such as basic pay and HRA, allowances of all sorts, and variable components like bonuses or incentives. Gross pay does not include deductions such as income or professional tax, retirement benefits like EPF, pension, or gratuity, and money paid back in lieu of an advance on salary. It can be calculated by adding all the paid heads of the CTC (and ignoring the aforementioned deductions).

Gross Pay = (Basic + Allowances + Benefits + Bonuses) - (Deductions + Retirals)

What is net salary?

A net salary is commonly known as an in-hand salary or take-home salary. It is the final amount that an employee receives in their account after all the mandatory deductions such as income tax and contribution to EPF; and voluntary deductions such as additional contribution in the form of voluntary PF (VPF), money deposited in the National Pension Scheme (NPS), etc. Net salary is helpful in making a monthly budget and planning your expenses. It is calculated by subtracting the deductions from the gross salary. 

Net Salary = Gross Salary - Taxes

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