What is the difference between gross and net salary? This is undoubtedly the most asked question by new hirings in an organizational setting, as the never-ending list of incomes and overwhelming numbers can make it stressful and pressuring for the fresh workers. However, it is not as challenging as it seems.
Want to know more about these two concepts and how they are different? No worries; here is everything you need to know about the gross salary and net salary.
Simply put, gross salary is the amount of salary an employee receives before it goes through regular tax deductions and cuts. For instance, if it was mutually decided between the employee and the employer that the salary amount would be $50,000, this amount would be called the gross salary.
This salary amount is the highest number on your monthly receipt and appears on the top of the receipt.
Components of the Gross Salary
- Gross salary is the one you receive under the salary contract. Here are some important components of a gross salary.
- Basic salary agreed on between the employer and employee.
- Bonuses and incentives you receive on a yearly basis.
- Conveyance allowance for routine home-to-work travels.
- HRA or House Rent Allowance, specific to some employees.
Quite the opposite, the net salary is the amount of money an employee receives after it has been gone through the tax deductions and regular cuts. It is the net amount that is deposited in your bank account or your paycheck. Usually, the net amount on the salary receipt is mentioned at the end of the salary receipt in bold or in large fonts so the employees can easily differentiate it from the gross salary.
Calculation of the Net Salary
Simply put, net salary is the deductions subtracted from the gross salary. Here is how you can calculate it using the numbers on your salary receipt.
- Net Salary, also known as Take Home Salary = Cost to Company Salary (the agreed-on amount you receive from the company) – EPF (Employee Provident Fund) – Retirals (HRA, retirement contributions, regular allowances, etc) – Deductions (Incentives and insurances) – Income Tax (also known as TDS).
- Net Salary = Gross Salary – TDS Income Tax – Deductions
- Net Salary < Gross Salary
What is Deducted from the Gross Salary?
To understand the concept of these salaries and differentiate them from one another, it is important to consider the regular deductions. Typically, these deductions vary from where you are working, the city you are working in, and the company you are working with. So, let us discuss some foundational deductions in detail.
Regular taxes are mandatory deductions that operate on the basis of the government’s taxation system. Typically, these taxes include government taxes, service taxes, travel allowances, medical insurance, etc. The amount is directly deducted from your gross pay and the percentage of these taxes depends on the salary amount.
The money that goes into your pension amount on a monthly basis falls under the bracket of retirement contributions. The amount of retirement contribution is only but a fraction of your salary, and usually is added up to your state pension. Some companies also offer to include it in additional private or company pensions.
Insurances also come under the taxable income bracket, given that they are a part of your benefit package and will be deducted from your salary. These can be anything from your rent insurance to medical insurance or scheme insurance. The amount of deductions depends on the amount of the insurance and what is the company’s tax requirements from the specific program.
Incentives are yet another type of deductions in gross salaries and are categorized as short-term and long-term deductions. Usually, a short-term bonus is a one-year tax paid within twelve months whereas long-term bonuses are those that are paid within three to five years bracket. Whatever the amount of the bonus is, do consider that it falls under the category of taxable income.
Some companies have explicit rules and guidelines for employees, including uniforms, abroad trips, travel, and so on, each of which requires a specific amount of allowance from the company. Therefore, all these incomes are taxable. The details of these deductions are mentioned in the employment contract.
Do consider that some of these deductions are pre-tax deductions, which means they are cut from the monthly salary before the company applies relevant taxes on it. Some of these include retirement contributions, healthcare, and travel allowance. In comparison, some of them are pre-taxed deductions like union fees, charity donations, and employee-specific incentives.
Gross Salary Vs. Net Salary: Key Differences
Now that we have discussed the components of the gross salary and its deductions, it is time to discuss some key differences between the two salaries. So, let us get into it.
The most apparent difference between the two salaries is their definition. For instance, the gross amount is the salary you receive before tax deductions on a yearly basis, whereas the net salary is what you take home and includes regular and specific deductions, like income tax, professional taxes, incentives, and insurance.
Simply put, the net salary is the subtraction of taxes and deductions from the gross salary. Speaking of their amount, it is pretty obvious that gross salary is the highest amount on your salary chart whereas the net salary is the lowest amount on the chart.
The next difference between the two salaries is their advantages and perks. So, if we talk about the benefits of gross and net salaries, gross salary is inclusive of all the amounts, including taxes, PF taxes, healthcare insurance, employee-specific incentives, traveling allowance, charity donations, etc. In contrast, net salary does not have these amounts, but you get these benefits after achieving these benefits from the gross salary, and end up with a net salary.
Moreover, the nature of the relationship between net and gross salary is that of interdependence. If we talk about their dependency, gross salary is largely dependent on the incentives, insurance, and other sort of benefits you get from the employer. In contrast, speaking of the net salary, it is dependent on the deductions from these benefits on a yearly basis.
Last but not least, their calculations are interdependent, which means you need one to determine the other. First, estimate the salary you are getting from the employer under the salary contract. Then, add the incentives and deductions from these incentives, and subtract it from the total salary.
Recap: Key Differences Between Net Salary and Gross Salary
- First of all, the employee receives the annual compensation from the employer, known as gross salary. After this, it goes through deductions and taxes based on the benefits in your gross salary. The resultant amount is called net salary.
- Net salary is always less than the gross salary.
- Net salary is dependent on gross salary.
- Net salary can be derived from the gross salary and deductions in numbers.
- Gross salary includes all the advantages an employee receives. In comparison, net salary is a fixed amount an employee gets on a monthly basis.
What is the difference between net salary and gross salary?
Simply put, gross salary is the income you receive before taxes and payroll deductions, whereas, the net salary is the amount you receive once it has gone through these deductions and taxes.
How can you calculate net salary?
Calculating net salary is easier and more straightforward than the gross salary. To calculate it, you need to have the deduction numbers and gross salary amount. The formula of net salary is; Net Salary = Gross Salary – Deductions – Income Tax – PF tax.
Can net salary be more than gross salary?
No, a net salary can never be more than a gross salary. This is because the gross salary is the amount you receive before deductions, and the net salary is the taxes subtracted from the gross salary.
Gross pay vs. net pay: how they are different and how you can calculate it. Well, to your surprise, it may not be as challenging as it sounds and appears at first sight. All you need to know is their definitions, formulas, and some key components to differentiate these two incomes.
I hope this guide has helped you in figuring out the basics and minute differences between gross salary and net salary.
Article Modified on October 28, 2023. The data in this article is written and collected by multiple authors. Learn how we research on About Us.