What is Gross Salary? Is your employer stealing from you?

The importance of a successful career is ingrained in our heads from a young age. One of the first question that we're asked as kids is, “What do you want to be when you grow up?”. Do you remember your answer? While almost all of us have creative answers like astronauts or magicians, most end up in the corporate sector as salaried individuals. Did you know, as of recent stats, about 21.9% of the Indian population account for salaried employees? 

Money is one of the biggest motivators, which is why an attractive salary becomes the key deciding factor for most job seekers. But how does one evaluate and compute this salary, and what does it comprise? Let us find out! 

Composition of Salary

You may have noticed that your take-home salary is different (lesser) than what had been quoted to you by your employer. Don't worry you are not being cheated! Though the term “salary” sounds simple, there's much to it than meets the eyes, or rather, the pockets. It is the job of the HR and payroll professional to break down the different components that form the compensation for better payroll processing. 

Following is a list of some common terminology used in relation to salary and employee remuneration.

1. Cost of Company (CTC) - CTC refers to the total salary package of an employee. It is what employees often think is going to be their salary but is never the actual take-home salary of the employee. It is inclusive of all monthly components like basic salary, perquisites, contributions and other allowances.
As the name suggests, CTC is the expense borne by the company to hire and retain its employees. It is greater than the employee's salary.

2. Basic salary  - Let's start off with the “basics” (😉). It is the sum of the salary paid to the employee, which does not include any perks, incentives or bonuses. The basic salary is lower than the take-home salary of the employee. This is because the basic salary and various allowances and monetary perquisites are components of the take-home salary.

3. Allowances  - These are monetary benefits provided by the employer over and above the basic salary. Since allowances are financial benefits given to employers by the organisation, they form part of the employee's salary component and thus, fall under the purview of taxation. Most allowances are taxable as they increase the employee's salary. The ones fully or partially exempt are those for which special exceptions are made under the income tax laws.

4. Perquisites  - These are extra benefits provided by the employer to his employee in addition to the basic salary and special allowances. These monetary or non-monetary benefits correlate to the employee's official position or structure in the organization. These may be taxable or nontaxable depending upon their nature. Examples of perquisites include but are not limited to utility charges coverage, housing accommodation, vehicle maintenance allowances, etc.

5. Net Salary  - You might often wonder what the term "take-home salary" really means. Maybe you are more familiar with the term Net Salary? Well, take-home salary and net salary mean the same thing. It is the amount left after subtracting all the eligible deductions pertaining to the components discussed above from the gross salary. 

Speaking of, how about we get to the central focus of this article, ie, Gross Salary?

What is Gross Salary?

The gross salary of an individual is the monthly or yearly salary before any voluntary or mandatory deductions are made from it. It includes income arising from other benefits such as overtime, holiday pay, bonuses, etc. On the other hand, the salary actually received by the employee is the net salary.

Components of Gross Salary

Your payslip might not have a lot of zeroes yet (don't worry, you'll get there), but your gross salary definitely has many components. The employer's job is to provide a breakdown of the various components and benefits of the employee's salary. These components are as follows-

1. Basic salary : This is the compensation every employee receives in exchange for their work during a pay period. Also called base salary, this amount is subject to change as allowances are added to it, and mandatory or optional deductions are removed from it.

2. Provident Fund Contribution : Both the employer and employee contribute 12% of the employee's basic salary to the Employee Provident Fund every month.

3. House Rent Allowances (HRA) : This component is paid by the employer to the employee to cover the accommodation expenses for renting a place for residential purposes. Although it applies to both salaried and self-employed individuals, it forms an integral part of salary and provides tax benefits.

4. Salary Arrears : These are due salaries that an employee is eligible to receive from the organisation. An employee becomes eligible for these in case of any hike in salary which was applicable earlier but actually applied at a later date.

5. Dearness Allowance : This is paid to the employees to negate the effects of inflation which raises the prevailing prices of goods. The motive is to help the employees cope with the changes through increments in salary so as to maintain their current comfortable lifestyle.

6. Conveyance Allowance : Companies may pay their employees a conveyance allowance to cover costs of traveling from their place of residence to the office in lieu of any transport facility. The employee may have their travel expenses reimbursed if such a benefit is provided. 

7. Other allowances such as special allowances, mobile allowances, leave travel allowances etc.

Calculation of Gross Salary

So far, we know that (Gross Salary - deductions) is net salary. But how to calculate gross salary in the first place? In mathematical terms, gross salary is the employee provident fund (EPF) and gratuity subtracted from the CTC. Let's try to understand with the help of an example – 

Say Mr A is an employee of XYZ Ltd. He receives the following components of salary.

Here the CTC, being the addition of all components is Rs 10,00,000 (8,00,000+75,000+50,000+45,000+30,000)

By the gross salary formula, 

Gross Salary= CTC - (EPF + Gratuity)

                    = 10,00,000 - (84,000 + 49,228)

                    = Rs 8,66,772

The Bottom Line

We had a closer look at all the components under the vast umbrella of salary, especially gross salary and its structure. With the ever-increasing trend of salaried individuals in our country and the recent hike in salary amounts, the youth is being more and more attracted to the corporate lifestyle. Thus, a deeper understanding of salary has become a prerequisite for a well-informed job decision. When it comes to compensation, every little contribution- monetary or not- counts for something and must be valued. After all, a month's salary is one's bread and butter!