Employees who are paid for their services are generally offered gross salary as their CTC, which is short form for cost to company. Cost to company is a term that implies the expense that the company will have to incur on an employee for a specific year. However, cost to company is an amount that is never equal to the amount of money you get to take home.
What is Meant by Gross Salary?
Gross salary is the monthly or yearly salary of an individual before any deductions are made from it. Components such as basic salary, house rent allowance, provident fund, leave travel allowance, medical allowance, professional tax etc. are some of the most prominent components of gross salary.
Components that Form a Part of Gross Salary:
Listed below are the various components that together make up the gross salary.
- Basic salary, pension component, gratuity component, salary arrears, fee or remuneration, payment for overtime, ex-gratia and performance-related cash awards
- Allowance such as house rent allowance, medical allowance, leave travel allowance, dearness allowance and other such special allowances
- Perquisites like rent for accommodation, electricity, water and fuel charges
- Pension received from former employer
Let us look individually at each of the components listed above.
Basic salary is the exact amount of salary before any deductions are made or extra components are added to the salary. The basic salary for an employee is usually lower than the gross salary or the take-home salary.
Gratuity is a part of salary that is paid by an employer to an employee to express gratitude for his/her services in the company. The employer may provide gratuity out of its own pocket or can avail a gratuity group plan from an insurance provider. Gratuity is generally paid to an employee on his/her retirement or when he/she leaves the company. However, according to Section 10(10) of the Income Tax Act, gratuity is payable only when an employee has completed 5 years with his/her company. The gratuity received by employees is taxable as “income from salary”.
HRA or House Rent Allowance:
HRA or House Rent Allowance is a salary component paid by employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person's salary. HRA is applicable to both salaried as well as self-employed individuals.
Salary Arrears refer to any amount that is paid as a result of salary hike. Generally salary arrears come in lump-sum for more than 1 month of time. For example, if your salary was increased in June but is applicable from the month of January. Then you are eligible to receive arrears worth the last 6 months.
Perquisites are benefits received by an employee as a result of his/her official position and are payable in addition to the salary received by them. Perquisites or fringe benefits can be taxable or non-taxable depending upon their nature.
These components are taxed separately from the employer’s account so as to maintain transparency and accountability.
Pension is defined as a specific amount paid regularly to an employee who has retired from his job. Pension is either paid by your employer or the government in case of government sector employees.
Components that do not Form Part of Gross Salary:
Following are the few things that do not form part of gross salary paid by an employer to an employee.
- Reimbursement for medical expenses
- Leave Travel Concession
- Leave encashment rolled out at the time of retirement of employee
- Free meals or snacks or refreshment provided by the employer to its employees, during office hours
Difference between Gross Salary and Net Salary?
The difference between gross salary and net salary is that while gross salary is your salary before any deductions are made from the salary, net salary is the salary an employee takes home after all deductions have been made.
Example of Gross Salary and Net Salary:
Suppose Manish works as a software engineer with XYZ Technologies Ltd. His gross salary per month is Rs.73,000 while his net take home is just Rs.60,000.
Listed below is the breakup of his salary components which justifies the marked difference in his gross and net salary.
Basic Salary = Rs.25,000
HRA = Rs.20,000
LTA = Rs.10,000
Provident Fund = Rs.3000
Travel Allowance = Rs.15,000
Total = Rs.73,000
Provident Fund – Rs. 2000
Income Tax - Rs. 1500
Profession Tax - Rs. 500
Loan Deduction - Rs. 9000
Total Deductions - Rs. 13,000
So, Net Salary = Gross Salary – Deductions = Rs.73,000 – Rs.13,000 = Rs.60,000
Taxation Process of Gross Salary:
For calculation of income tax, gross salary minus the eligible deductions are considered. For example, you will have to deduct HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.
This taxation process is different for self-employed and salaried individuals.
News About Gross Salary Tax
Government Employees may be asked to Invest Part of their Hiked Salary
The Central Government is reportedly considering creating a fund wherein government employees would invest a portion of their salary hike instituted by the 7th Pay Commission. This fund would then be used to recapitalise state-owned banks.
The investment in these bank capitalisation bonds would come with benefits such as tax breaks and higher returns. The scheme is likely to target high-income government officials from the rank of Section Officer. As per sources, these officials may be asked to contribute 50 percent of the salary increase to the funds.
A decision is yet to be taken on the proposal, which is currently with top Finance Ministry officials and Committees of Secretaries.
Public sector banks are currently bearing the burden of over Rs. 3.61 lakh crore of gross non-performing assets, as on December 31, 2015. Private sector banks, on the other hand, have gross NPAs worth Rs. 39,859 crore.
15th April 2016
Budget 2016: Small Businesses and Professionals get a Tax ease
Tax compliance burden eases off on small businesses and professionals, the gross income has been raised to Rs. 2 crore, from the earlier cap of Rs. 1 crore small businesses and Rs. 50 lakh for professionals. These changes will come into effect from 1st April 2017. Any small business with a turnover of Rs. 5 crore, will get an additional 1% lower of corporate income tax to 30% from 29% earlier. This can be filed under the presumptive taxation which is available under section 44AD of the IT Act 1961. The presumptive taxation is currently available for a turnover or gross receipts not exceeding Rs 1 crore.
3rd March 2016