You may have come across the term “Gross Salary” in your paycheck. It is the total amount you have earned during the paid interval. It includes your basic salary and all the bonus amounts if any. However, you never receive a gross salary as your take-home pay. Several deductions are made based on your enjoyed benefits and tax payment. You might be wondering why these deductions are made and what they signify. This article is focused on breaking down the key components of gross salary for your better understanding when you see the list of deductions on your paycheck.
What is the definition of Gross Salary?
Gross Salary can be defined as the amount an employee is set to receive before any mandatory or voluntary deductions are made. It includes income from all sources and thus, it covers every benefit or allowance enjoyed by the employee during the paid interval period.
What are the components of Gross Salary?
Gross Salary can be broken down into two components: Basic Salary and Benefits.
- Basic Salary is the amount that was decided on mutual consent and is the base amount paid to personnel in exchange for his or her service. It is paid at regular intervals usually per month and is presented as an annual amount.
- Benefits are referred to the aggregate monetary amount of utility received by the employee from his or her employer for the paid interval period. The Benefits enjoyed by the employee can be again divided into two subdivisions – Allowances and Perquisites.
- Allowances are direct benefits received by the personnel. There are five major allowances namely,
- HRA (House Rent Allowances): House Rent Allowance or HRA is the monetary support received by personnel from the employer to pay for the cost of renting a home.
- LTA (Leave Travel Allowance): Leave Travel Allowance or LTA is received by personnel from the employer for traveling on a leave.
- Mobile Allowance: Mobile or Telephone Allowance is received by personnel from the employer to cover up the expense of using personal phones for business use.
- Transport Allowance: Transport Allowance is received by personnel from the employer to meet transport expenses from the place of residence to the office.
- Special Allowance: Special Allowance is a predetermined sum granted to personnel in addition to their normal income to achieve specified criteria.
- Perquisites refer to the indirect benefits offered by the employer. Again, there are five major perquisites namely,
- Performance bonus: Employees are given a performance bonus if they achieve a specific goal or accomplish certain predetermined objectives.
- Overtime bonus: An overtime bonus is offered to employees when they work extra hours in addition to their normal working time to finish a project.
- Employer-provided lodging: Employers may decide to provide accommodation for personnel. The company signs a lease agreement with the landlord and offers its employees ‘ready to move-in’ lodging.
- Gas, Water, and Electricity bills: Employers may also decide to pay personnel’s utility bills as an added bonus to his or her service.
- Special arrears: Special arrears can be granted by employers to give personnel a predetermined sum in addition to their normal income to achieve specified criteria.
It’s worth noting that only the important allowances and perks are presented above. An organization can further charge allowances or allow perquisites on mutual consent with the employee.
In certain cases, Pension can also be a part of the gross salary if the employee receives a pension from their former employer. It is the amount paid by an organization or government to retired personnel.
How do you figure out your take-home pay from your gross salary?
It is not quite simple to calculate your take-home pay from your gross salary. Apart from simple deductions and bonus calculations, you need to consider some more factors.
Employees have to pay Income Tax, Professional Tax, and Provident Fund from their pay slab. You can calculate your income tax from the latest income tax slab rates. Professional Tax is computed based on the most recent professional tax slab of your respective state and Provident Fund is calculated at 12% of your basic pay.
Your net salary, also known as take-home pay, is the amount you receive after deducting provident fund contributions, taxes, and adding any bonuses you receive.
Q. Is it mandatory to pay deductions?
A. Deductions on gross salary are mandatory. The rates may differ according to the states but it is necessary to pay them.
Q. Is it mandatory to pay tax on allowances?
A. Yes. It is mandatory to pay tax on taxable allowances. Some allowances are fully exempt from taxes such as allowances given to a judge at the Supreme Court or a High Court.