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What Is Net Pay - Explanation & Examples

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What Is Net Pay - Explanation & Examples

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First, they came for your CTC, then they came for your gross salary, and now they want your payslip. The world of workplace terminologies can be myriad and complex. This article should unpack some of that for you.

Know Your Salary Terms

Every employed person should understand the difference between net salary and gross salary in respect to the offered CTC.

CTC, or Cost to Company

CTC is your overall cost to the company. This is an inclusive figure that most companies use on their offer letter showing you how much you stand to earn, as well as the retirement benefits and tax liabilities that the employer will pay on your behalf. Naturally, this is the highest figure of the three terms and is often used to negotiate salary in future jobs. 

Gross Salary

The gross salary contains all the components from your CTC minus the contributions made by the company as part of your retirement benefits. These are, typically, contributions to the Employee Provident Fund, Pension Plan, and/or Gratuity. So, gross salary is the sum of all the payments made to you and the direct/indirect benefits offered by the company.

Net Salary

Net monthly salary means what you get in hand at the end of each month. It is, essentially, the gross salary but after the deduction of taxes from it. This tax is calculated at an annual level based on your CTC and then divided by 12 to get a monthly figure which is deducted at source by your employer. It is also known as TDS.

Importance of Net Salary

Typically, a company offers you a CTC with an annual breakup as part of the offer letter. While it contains absolute salary heads and figures, usually, a lot of the components in the salary structure can be quite unclear and fuzzy. Moreover, it does not give you an accurate picture of the actual compensation you will receive to handle personal expenses such as bills, EMIs, utility payments, trips, purchases, etc.

When it comes to salary calculations, knowing the net salary is vital as it helps you plan and manage your monthly budget efficiently. Furthermore, if the CTC is large and attractive but your net salary is low, then it is surely time to reconsider your position and take more financially active decisions.

How to Calculate Net Salary? 

If CTC is the quoted figure, then the net salary calculation formula becomes:

S. No.

Salary Component

Annual Amount 

1

CTC

₹12,00,000

The breakdown of the CTC is as follows.

2

Basic Pay

₹5,50,000

3

House Rent Allowance (HRA)

₹3,00,000

4

Medical Allowance

₹30,000

5

Leave and Travel Allowance (LTA)

₹46,000

6

Other allowances

₹2,00,000

7

Provident Fund Contribution (PF)

₹54,000 

8

Gratuity

₹20,000

 

Adding serial numbers 2 to 6 you will get your gross salary of ₹11,26,000. As you can see, this is already lower than the actual CTC of ₹12 Lakhs. To calculate your net salary, you need to further deduct taxes based on your individual slabs and voluntary exemptions permitted under the various sections of the Income Tax Act. You can find your anticipated taxes under your monthly payslip or the offer letter.

Frequently asked questions

Is net salary monthly or yearly?

Most often, net salary is expressed per month. This is because the net salary is the actual amount deposited into your account by your employer, post all deductions like taxes, EPF, and other retirals. The chief importance of net salary is to be able to determine your monthly earnings and plan your monthly expenses accordingly. Hence, net salary calculated monthly is a good measurement yardstick. However, you can multiply the monthly salary by 12 to get your annual net salary in case you’re planning to borrow money in the form of a loan or any other line of credit.

Is net salary in-hand salary?

Yes, net monthly salary means in-hand salary or take-home salary. The net salary is what you earn each month and is calculated after all the deductions such as taxes, retirement benefits, contributions to provident funds, etc. Since it is the actual amount deposited in your account, hence, it is known as in-hand salary.

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