Gross Salary – Guide on Meaning, CTC Calculation & Components

Salaried employees are compensated by their employers and the pay that they receive is called their salary or compensation. An employee’s salary is divided into two main parts – gross salary and net salary. Let’s understand what gross salary is all about and how it is calculated.

Gross salary meaning – What is gross salary?

Gross salary, also called Cost to Company (CTC) is the total amount of salary that an employer pays an employee. It includes all the allowances and perquisites provided by the employer. The gross salary denotes the maximum compensation that the employer pays to each of its employees.

Gross salary can be expressed as an annual salary or as a gross monthly income. The monthly gross salary means the maximum monthly income that your employer pays while the annual amount is the aggregation of the monthly gross pay.

Components of gross salary

If you look at the salary slip or appointment letter of an employee, you would find that the gross annual salary is made up of different components. Some of the most common components of gross salary include the following –

Direct components

• Basic salary
• Dearness Allowance
• House Rent Allowance, also called HRA
• Leave Travel Allowance (LTA) or Leave Travel Concession (LTC)
• Vehicle allowance
• Telephone or mobile allowance
• Other special allowances

Indirect components

• Annual bonus or performance-linked incentive
• Payment for overtime
• Cost of the accommodation offered by the employer
• Payment of utility bills, like electricity bill, gas bill, water bill, etc. by the employer
• Meal coupons
• Arrears of salary

Here’s a detailed look into the components of the gross salary –

1. Basic salary 
   The basic salary is called the take-home salary which is paid to the employee without considering any allowances of perquisites. No deductions are allowed from the basic salary and it is also used for computing the eligible tax benefits that employees can claim on their allowances.
   
2. Dearness allowance Called DA, in short, Dearness Allowance is the allowance paid to employees to meet the rising lifestyle expenses due to inflation. The Dearness Allowance is added to the basic salary and together they are called the basic pay on which various other benefits are calculated.
   
3. House Rent Allowance Called HRA in short, House Rent Allowance is a tax-deductible allowance that employers pay to employees to enable them to pay the rent of their accommodations. You can claim a tax deduction for the HRA received from the employer if you are living in a rented house subject to specified limits.
   
4. Leave Travel Allowance or Concession  Called LTA or LTC in short, this allowance is paid to employees to enable them to take a vacation. LTA is a tax-deductible component of the salary wherein employees can claim deduction on the travel expenses incurred when taking the trip.
   
5. Telephone or mobile allowance This allowance covers the cost of telephone, mobile or internet connection used by employees for business purposes.
   
6. Vehicle allowance 
   This allowance is paid to cover the cost of using a vehicle for transportation of the employee from his/her residence to the place of work and back.
   
7. Other special allowances
   Special allowances include various other allowances that employers might offer their employees.
   
8. Bonus
   Employers might offer a  lump sum bonus to employees annually linked to their performance or if the company makes a profit due to the employee’s efforts.
   
9. Overtime payment
   If employees work beyond the official working hours, they might receive additional payment for overtime.
   
10. Meal coupons
    Employers also offer meal coupons or vouchers that employees might use for paying for food items.
    
11. Cost of accommodation and utility bills
    Employers might offer accommodation to their employees, the cost of which is borne by the employer. Similarly, the employer might pay the utility bills incurred by its employees every month.
    
12. Arrears of salary
    If there is a salary hike or an increment in the salary, employees become entitled to receive arrears of salary.

Other benefits that do not form a part of gross salary

Employers might offer other benefits to their employees which do not form a part of their gross salary. These benefits include the following –

1. Reimbursement of travelling expenses when on a business trip
2. Snacks, beverages, or other refreshments provided during office hours
3. Lunch or other meals provided at office meets or conferences

Difference between gross salary and net salary

As mentioned earlier, the salary of an employee is divided into two parts – gross salary and net salary. Both these salaries are different from one another. Here’s how –

Example 

Mr Verma joined ABC Limited with a CTC of INR 10 lakhs. The salary consists of basic pay of INR 7 lakhs, HRA of INR 2 lakhs and other allowances of INR 1 lakh. The EPF contribution is INR 80,000, TDS is INR 1 lakh and professional tax is INR 50,000. Here’s how to calculate gross salary and net salary –

Difference between gross salary and basic salary

Gross salary and basic salary are two different concepts that should not be confused to be the same. Here are the main differences between the two 

What is the Cost to Company?

The Cost to Company (CTC) is another name for gross salary. It is the cost that the company incurs in employing an individual. CTC denotes the maximum compensation paid by the company to an employee inclusive of the basic pay, allowances and perquisites. Moreover, if there are EPF contributions, gratuity payments or superannuation benefits payable to employees, they are also added in calculating the CTC. The CTC can be divided by the number of months to ascertain the gross monthly remuneration that you would be eligible for.

Calculation of PF from gross salary

Organisations that employ 20 or more employees have to register with the Employees’ Provident Fund Organisation (EPFO) for paying EPF to employees. For organisations having less than 20 employees, EPF registration is voluntary.

Moreover, employees earning less than INR 15,000 per month as basic pay and Dearness Allowance have to mandatorily have an EPF account. For employees having a higher salary, EPF is a voluntary saving.

Whether mandatory or voluntary, EPF savings have become a common component of most organisations. Under EPF, 12% of the employee’s basic pay and dearness allowance is directed to the EPF account every month. Employers also contribute the same amount but 8.33% of the employer’s contribution, subject to a limit of INR 1250, is directed to the Employees’ Pension Scheme (EPS) while the remaining is retained in the EPF account. 

Here’s an example –

Say your basic pay + Dearness Allowance is INR 20,000. The EPF contribution would be as follows –

PF calculation is done on the basis of the basic salary and the dearness allowance. The gross monthly remuneration is not used for PF calculation because it consists of other allowances too which are not included in the salary when calculating the EPF contributions.

Definition of gross salary under Section 17(1)

Section 17(1) of the Income Tax Act, 1961 lays down a specified definition of the term ‘gross salary’. According to this section, the gross pay meaning includes the following benefits received from an employer –/

• Wages
• Pension or family pension
• Gratuity
• Advance on salary
• Commission, fees, profits, or perquisites availed in lieu of or in addition to the salary or wage received
• Salary in lieu of leave also called Leave Encashment
• The annual payment to an employee subscribing to a recognized provident fund up to the extent that such payment is chargeable under the provisions of Rule 6 of Part A of the fourth schedule
• The total amount of taxable portion transferred from an employee’s unrecognized provident fund to a recognized provident fund
• Employer’s or Government’s contribution towards an employee’s pension scheme as referred under Section 80CCD of the Income Tax Act, 1961

How is gross salary taxed?

When calculating the tax liability, the gross pay is subject to tax-free deductions and exemptions after which the tax liability is calculated. The following are deducted from the gross salary to calculate the amount of salary that would be subject to tax –

• Standard deduction of INR 50,000
• Tax-exempt portion of the House Rent Allowance 
• Tax-exempt portion of the Leave Travel Allowance 
• Other tax-free allowances and perquisites like meal vouchers
• EPF contributions under Section 80C
• Other deductions under Section 80C include home loan principal repayment, tuition fee of children, life insurance premiums, ELSS contributions, 5-year fixed deposits, PPF contribution, etc.
• NPS deduction under Section 80CCD (1B)
• Deductions available under Section 80D for health insurance premium
• Other deductions available under Chapter VI A of the Income Tax Act, 1961, i.e. deductions from Section 80C to 80U
• Other tax-free exemptions like home loan interest under Section 24(b)

After all these deductions and exemptions are deducted from the gross pay, the tax liability is computed as per the applicable income tax slabs. For the financial year 2021-22, the income tax slab rates are as follows for resident Indian individuals aged up to 60 years –

If you are aged 61 years and above, the tax slab would be as follows –

Example 

Say your gross salary is INR 20 lakhs and other details of the salary are as follows –

• Tax-free HRA = Rs.1 lakh
• LTA = INR 50,000
• Section 80C = INR 1.5 lakhs
• Health insurance = INR 50,000
• NPS = INR 50,000

The tax would be calculated as follows –

Alternative ways to save taxes

To reduce your tax liability you can use various ways to save taxes as the Income Tax Act, 1961 allows different types of deductions and exemptions. The ways in which you can save taxes include the following–

• Use 80C limit completely Section 80C allows a deduction of up to INR 1.5 lakhs. Make use of the full limit of the section by investing in –
  • Life insurance plans
  • ELSS schemes
  • 5-year fixed deposit scheme
  • National Saving certificate
  • Employees Provident Fund
  • Public Provident Fund, etc.
    
• Invest in health insurance Health insurance premiums earn you a deduction under Section 80D up to INR 1 lakh. So, invest in suitable health insurance policies for yourself and your parents.
  
• Buy your own homeIf you buy a home and avail of a home loan, you can get dual tax benefits. The principal paid would be allowed as a deduction under Section 80C while the interest paid would be allowed as a deduction under Section 24(b) up to INR 2 lakhs. Moreover, if you are a first-time homebuyer and the stamp duty value of the property is within INR 45 lakhs, you can earn an additional deduction of up to INR 1.5 lakhs under Section 80 EEA on the home loan interest paid.

So, if you are a salaried employee, understand the gross salary meaning, how it is calculated and its components so that you can understand your compensation.