A salary is an amount given by the employer in return for the services delivered by the employees. This is a fixed amount of payment given out periodically; usually, the period is a month unless specified by the employer. And you will find it is denoted as an annual package. Generally, salaries are constituted by comparing the employee’s salaries for similar skills in different industries. Though salary counts as a collective term, it is divided majorly into two types which are net salary and gross Salary.
This article will take you through every element related to Net Salary so that the confusion between it and gross salary no longer persists.
What is Net Salary?
Net Salary, commonly referred to as take-home salary, is the amount an employee gets after all the deductions are made, and it has been taxed accordingly. This is the in-hand amount given to an individual after the Income Tax has been deducted at source, and as per the company’s policy, all the other necessary deductions have been made.
Net Salary Calculation
Net Salary is obtained by subtracting the Public Provident Fund, Income Tax, Professional Tax from the Gross Salary. This means that:
Net Salary= Gross salary- (Income Tax+ Public Provident Fund+ Professional Tax)
The Employee Provident Fund and the Public Provident Fund are a certain percentage of an individual’s salary, and they cannot be less than 12% of the total basic salary. But gratuity only holds close to 5% of an individual’s basic salary. Thus, the Net Pay should be like:
Net Pay= Direct Benefit- Deductions
On the other hand, the income tax is deducted by the employer at the source, and this deduction is dependent on an individual’s gross salary. In addition, the basic salary of an individual should be almost 50%-60% of the Gross Salary.
Gratuity Calculation
The formula for calculating the gratuity:
Gratuity= (Basic Salary*DA) *15/26* Total number of years of service
Gratuity deducted on a yearly basis=15/26* Monthly basic salary
After this, you should calculate the taxable income, which can be obtained by subtracting the Professional Tax, Leave Travel Allowance, Medical Insurance, Tax Saving Instruments, Tax-Free Allowance, and House Rent Allowance from the Gross Salary of an individual.
Taxable Income= Gross Salary- (PPF/EPF Investment+ Medical Insurance+ Tax Saving Instruments+ House Rent Allowance+ Leave Travel Allowance+ Other deductions)
Gross Salary Calculation
Gross Salary is formulated by adding all the allowances, including income tax, to the basic salary without deductions. And the basic salary referred to here is the fixed amount that an individual takes home from their overall compensation package. Here is the formula for gross salary calculation:
Gross Salary= Basic Salary+ HRA+ Other allowances
What is the difference between Net Salary and Gross Salary?
Net Salary is the fixed amount an individual can take home when all the deductions, including income tax, have been done. Whereas Gross Salary is the total salary that includes all the allowances and monetary benefits are given to the individual without making any deductions. Net Salary is obtained by subtracting the deductions like pension, income tax, professional tax, etc., from the Gross Salary. And Gross Salary is the basic salary plus the allowances like medical allowance, HRA, LTA, etc.
Some of the Ways to Increase your Net Salary
Here are a few ways by which an individual can increase their net salary:
- Any investment of up to ₹1.5 lakhs in ELSS, Employee Provident Fund, Professional Public Fund, LIC, Home Loan, National Savings Certificate can get you the benefits of tax under Section 80C, 80CCC, and 80CCD of the Income Tax Act of 1961. While filling the Income Tax Returns, these will prove to be beneficial.
- You can invest in infrastructure bonds for up to ₹20,000. Though these bonds have a 5 to 15 years lock-in period under Section 80CCF of the Income Tax Act, one can get tax benefits.
- An individual can choose to take the food coupons if the employer provides them.
- Depositing the money in Savings Account and except the interest earned, up to ₹10,000 can be availed as tax benefits.
- If you plan to take a home loan, know that you can get up to ₹3.5 lakhs of tax rebate.
- Invest in RGESS, which is the Rajiv Gandhi Equity Savings Scheme, but in this case maximum of 50% of the total money invested can be claimed under tax exemption, and there should be no trading done through a DEMAT account. Also, the salary of an individual should not be over ten lakhs.
- Any medical insurance taken by individuals for their family or themselves can get up to ₹35,000 tax exemption.
- Take the benefits of the Leave Travel Allowance. If you plan to travel with your family, you can get tax benefits by submitting the bills. This LTA allowance is completely taxable if you travel and do not claim the same.
- Some of the companies offer their employees phone or mobile bill reimbursement. If you do
not claim these bill amounts, they will have to be paid by you.
Wrapping Up
Now that you know all that is required about the Net Salary do not miss a chance to increase it by following the ways mentioned above.
Frequently Asked Questions (FAQs)
How is Net Salary calculated?
Net Salary= Gross Salary-All the Deductions
Is net pay a salary?
Net Pay or Net Salary is the fixed amount an individual takes home from their compensation package.
What is the difference between CTC and Net Salary?
Net Salary is the amount after all the deductions are made, and CTC is the annual package offered to an individual, including all the allowances.
What is my net income salary?
It is the total income after all the deductions are made.
Is net pay calculated after taxes or before?
Net Pay is calculated after the income tax deductions are made.
