Gross Salary: An Overview
‘Gross salary’ is one of the most common terms that you will come across frequently as a salaried employee. Your current employer may negotiate this amount with you, your potential employer may ask about your current gross salary, and your company’s HR may discuss increments based on this sum.
So, to successfully negotiate pay hikes or your salary at a new company, you need to understand the meaning of gross salary and how it affects your finances. In this article, we’ll take a closer look at what the gross salary is, what it includes and excludes, and how it differs from your net salary.
What Is Gross Salary?
Gross salary is the aggregate amount paid by an employer to their employee before any mandatory or voluntary deductions come into effect. It is the total amount that your employer pays you each month, before accounting for any deductions like taxes on salary.
You can find the gross salary mentioned in your pay slip. From this sum, various deductions are made for professional tax, TDS and your contributions to provident funds. The result is what you will actually receive as salary in hand.
The Key Components of Gross Salary
Depending on your company’s internal policies and your pay structure, the exact components included in your gross salary may vary. However, based on the meaning of gross salary and the general guidelines prevailing in most companies, the main components of an employee’s gross salary include:
The basic salary is the most fundamental component of the gross salary. It is a fixed sum that your employer pays you each month, and it forms the basis for computing other components like the dearness allowance and the house rent allowance.
Dearness Allowance (DA)
The dearness allowance is computed as a percentage of the basic salary. It is typically paid out to employees of the central and state governments to meet the rising costs of living over time.
House Rent Allowance (HRA)
The house rent allowance is a part of the gross salary that employers pay employees to cover the costs of housing in the city of employment. It is also typically computed as a percentage of the gross salary.
Leave Travel Allowance (LTA)
Employers pay this allowance to help cover the costs of travel incurred by employees when they are on leave. It may be paid as a monthly or annual benefit and is included in the gross salary, irrespective of the frequency of payment.
Special allowance is a kind of allowance that employers pay employees for different purposes or reasons. If you receive this kind of allowance from your employer, it will form a part of your gross salary.
Any other perquisites that your employer pays you in addition to the allowances listed above are also included in the gross salary.
Salary Advance and/or Arrears
Salary advance refers to the salary that you receive before it is actually due, while arrears refer to the salary paid during this year but not taxed in any previous years. Both these components form a part of the gross salary.
Bonus and/or Commissions
Your employer may also pay out a bonus, commissions or other types of performance-based incentives. Irrespective of the terminology, they are all considered a part of your gross salary.
Components Excluded from Gross Salary
Some components may not form a part of the gross salary directly. Here’s an indicative list of such components:
- Reimbursement of certain costs like medical expenses
- Free meals or other free non-monetary benefits provided by your employer
- Leave encashment benefits
Gross Salary Calculation
The gross salary of an employee is the sum of all the payouts and allowances received from the employer. It can be easily calculated using the formula given below:
|Gross Salary = Basic Salary + All the Allowances and Payouts Received from the Employer
Here’s an example to help you understand how the gross salary can be computed using the formula shown above. Consider the following breakup for an employee’s salary.
|House Rent Allowance
|Gross Salary (sum of the above)
Difference Between Gross Salary and Basic Salary
The basic salary is a fixed amount that is paid by the employer each month. It is only a part of the gross salary, and not to be confused with the gross salary itself. For instance, in the above example, the basic salary is Rs. 50,000, while the gross salary is Rs. 1,00,000.
Difference Between Gross And Net Salary
The meaning of gross salary, as discussed above, is the sum total of all the payments received from the employer. When you deduct specific sums like taxes, retirement contributions and the like from the gross salary, you get the net salary or the take-home pay.
You can compute this sum using a net salary calculator. Alternatively, you can use the formula shown below to compute the net salary from the gross salary.
|Net Salary =
Gross Salary — Income Tax or TDS — Provident Fund Contributions — Professional Tax
The Significance of Gross Salary
The significance of your gross salary extends beyond just a simple figure on your paycheck for several reasons, as outlined below:
Basis for Negotiation
Your gross salary is typically the starting point when you carry out employment negotiations or discuss a pay raise at work. Understanding your gross salary can give you greater leverage during such negotiations.
Knowing your gross salary also helps you with budgeting and financial planning. While the net salary tells you how much you’ll take home, the gross figure gives you a comprehensive view of your total earnings.
Loan and Credit Assessments
When you apply for loans or credit cards, banks and financial institutions often look at your gross salary to determine your creditworthiness and the maximum credit limit you are eligible for.
Calculations for taxes on salary usually begin with the gross salary as the base. Knowing this figure can help in understanding potential tax liabilities and make it easier to take advantage of deductions or exemptions.
Your gross salary also reflects the total value your employer places on your role and responsibilities. Thus, it serves as an indicator of the market value of your role market value and helps you understand how your compensation compares with industry standards.
This sums up the fundamentals of the meaning of gross salary, what it includes and how it is calculated. By becoming familiar with this basic concept in personal finance, you can now understand your payslip better, carry out salary negotiations more effectively and save taxes with strategic tax planning.
Are bonuses and commissions included in the gross salary?
Yes, bonuses and commissions are considered to be a part of the gross salary. Any other incentive-based payments you receive from your employer are also included in the gross pay.
What components make up the gross salary?
The gross salary is the total amount you receive from your employer. The components included in this amount are the basic pay, dearness allowance if applicable, house rent allowance (HRA), other allowances, bonuses, commissions, overtime pay and other monetary benefits.
How do deductions affect my gross salary?
Deductions do not affect your gross salary in any way. The meaning of gross salary itself implies that it is the total amount received from your employer before the effect of any deductions.
Is the gross salary the same as the take-home salary?
The gross salary is different from the net salary or the take-home pay. When you subtract deductions like taxes on salary and retirement contributions from the gross salary, you get the take-home pay.
Do I need to pay tax on my gross salary?
No, your gross salary is adjusted for various exemptions and deductions like house rent allowance (HRA) exemption, EPF deduction, etc., to arrive at the taxable salary. This is then added to your total taxable income to compute your overall tax liability.