Gross Salary vs Net Salary: Difference Between Gross and Net Salary
On your payday, your salary seems to be less than what you bargained for. That’s because of the distinction between gross salary vs net salary. To understand this it is essential to clear your doubts during the interview process. Therefore it is essential to take an online interview preparation course to understand what to ask and how to answer during an interview. In this blog, we’ll discuss the difference between gross salary and net salary and how they can impact your financial decisions.
What is Gross Salary?
Gross salary is the total amount of money an employee gets paid before any deductions or taxes are taken out. This includes their regular pay, bonuses, and other forms of compensation from their employer. It’s used to figure out how much someone earns for tax purposes and gives a general idea of what they make in a certain period of time. For businesses, it means all the money they make from different places minus the costs of making and selling the products.
Some components of gross pay include:
- Your base salary
- Overtime pay for working extra hours (if any)
- Extra bonuses and commissions for good performance
How To Calculate Gross Pay?
If you are a salaried employee, calculating your gross salary is quite straightforward. To do this, divide your annual salary by the specified pay periods. That means, dividing your yearly salary by the number of times you’re supposed to be paid. Whether monthly, weekly, etc.
For example;
| A worker earns a monthly salary of ₹50,000 and receives additional benefits such as HRA (₹10,000), special allowance (₹5,000), and performance bonus (₹3,000). They also did 10 hours of overtime work at a rate of ₹200 per hour this month. The employer contributes to their PF with an amount of ₹2,000 every month and the employee has yearly health insurance worth ₹4,000. To calculate their gross salary, add up all these components: Gross Salary = ₹50,000 (Basic Salary) + ₹10,000 (HRA) + ₹5,000 (Special Allowance) + ₹3,000 (Performance Bonus) + ₹2,000 (Employer’s PF Contribution) + ₹4,000 (Health Insurance) Gross Salary = ₹50,000 + ₹10,000 + ₹5,000 + ₹3,000 + ₹2,000 + ₹4,000 = ₹74,000 per month. So, in this example, the employee’s gross salary is ₹74,000 per month. |
What is Net Salary?
Net income is the final amount of money you have left after subtracting all your expenses from the total amount of money you earned. This can be calculated for personal finances or a business, and it shows how much profit or loss has been made. For individuals, net income is the actual amount of money an employee receives in their paycheck after all taxes and deductions have been taken out. Net salary gives you a clear idea of how much you can expect to take home each month for personal expenses and budgeting purposes.
Some common deductions from your salary include:
- Income tax
- Retirement contributions,
- Professional tax
- Health insurance premiums
How To Calculate Net Salary?
The formula for calculating net salary is:
Net Salary = Gross Salary – Income Tax – Employees PF Contribution – Professional Tax – Other Deductions.
Remember, we’ve already calculated the gross salary in the previous example, which was ₹74,000 per month. So, to calculate the net salary:
| Let’s assume that the employee has ₹5,000 income tax, ₹2,000 as their PF contribution, no professional tax, and no other deductions: Net Salary = ₹74,000 (Gross Salary) – ₹5,000 (Income Tax) – ₹2,000 (Employee’s PF Contribution) – ₹0 (Professional Tax) – ₹0 (Other Deductions) = ₹67,000 Net Salary = ₹74,000 – ₹5,000 – ₹2,000 = ₹67,000 So, in this example, the employee’s net salary would be ₹67,000 per month. |
Difference Between Gross and Net Salary: Comparison
When it comes to gross salary vs net salary, there are certain differences. As we’ve already discussed, gross pay is the total amount an organization pays its employees. This is before taxes are taken out. Net income, on the other hand, is what an employee actually receives after taxes have been deducted from their gross pay. On a payslip, gross pay will be listed at the top and net income will be shown at the bottom to show how much was taken out for taxes.
Here is a tabular representation of the difference between gross salary and net salary:
| Aspect | Gross Salary | Net Salary |
|---|---|---|
| Definition | Gross Salary is what you earn before taxes. It includes any benefits and allowances. | Net Salary is the amount you receive after deductions. |
| Calculation | To calculate your gross salary, you need to add up all the money that your employer pays you. This includes things like wages, bonuses, and any other compensation they give you as part of your job. | To figure out your net salary, you need to subtract any deductions and required taxes from the total amount of money you earned. |
| Amount | This is the complete salary amount without any deductions whatsoever. | The amount of money received as net salary is typically lower than the gross pay due to various deductions. |
| Formula for calculating | Gross Salary = Basic Pay + HRA + Allowances | Net Salary = Gross pay – Deductions |
| Components | Consists of various parts such as rent allowance, transportation allowance, and medical benefits. | Made up of income taxes (taxes on earnings), professional taxes and fees, retirement savings plans, pensions, and other similar items. |
When considering your salary breakup, you get to see that the gross pay vs net pay differ in terms of deductions made. However, Net salary matters more for knowing your real financial status and planning expenses.
Conclusion
Gross salary is the amount of money you earn before any deductions are taken out. Net salary is the actual amount that ends up in your pocket after taxes and other deductions have been subtracted from your gross pay. Knowing the difference between gross salary vs net salary can help you make better financial plans for yourself, whether it’s starting a new job or managing your budget more effectively.
Have you ever received a salary that was smaller than expected because you didn’t know the difference between the two? Tell us how you handled these differences in the comments section. Also, read about the difference between stipend and salary.
