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Difference between CTC, gross salary, and in-hand salary
Have you ever wondered about the differences between gross salary, net salary, and CTC? These terms aren't just payroll jargon; they directly impact your business operations and shape how your team perceives their earnings and benefits.
Understanding these different types of employee compensation can help you create transparent and attractive salary packages. In this article, we’ll compare gross salary vs net salary vs CTC, and provide you with all the information you need to know about salary structures.
Cost to Company (CTC)
Cost to Company (CTC) represents the entire compensation package that an employer offers to an employee. This includes the basic salary, allowances, bonuses, benefits, and other forms of remuneration. CTC is often mentioned in job postings and offer letters to convey the total compensation an employee would receive for the work they perform. It is important to understand that CTC is different from the salary your employees take home, as CTC usually includes taxes and statutory deductions that are applied to the employees’ earnings.
Learn more about CTC here.
What is gross salary and how is it different from CTC?
Gross salary refers to the salary that an employee earns before any deductions or taxes are applied. It includes basic salary, house rent allowance, any other allowances, and bonuses. The formula for gross salary is as follows:
Gross salary = Basic salary + HRA + Other allowances + Other earnings
It is important to note that gross salary is different from CTC. Here is a table highlighting the difference between CTC and gross salary:
| Parameters | CTC | Gross salary |
| Meaning | Total cost incurred by the employer for an employee | Total earnings before any deductions are made |
| Purpose | Used to determine the employer's expenses and financial planning | Used to determine the employee's income tax obligation |
| Components included | Basic salary, fixed allowances, variable allowances (e.g. transportation or medical allowances), other perquisites such as meal coupons, and employer’s contribution to provident fund | Basic salary, house rent allowance, and other allowances |
| Amount value | Generally higher than gross salary | Lesser than CTC and higher than take-home salary |
| Variability | Can vary based on performance, as it includes incentives and bonuses | Set amount that remains constant, unless the employee’s salary is revised |
What is net salary and how is it different from gross salary?
Net salary is the final amount an individual receives after all deductions have been subtracted. It can be calculated using the formula:
Net salary = Gross salary – (EPF + Income Tax + Professional Tax + Gratuity)
The distinction between gross salary and net salary lies in the deductions for employee provident fund, gratuity, professional taxes and income taxes, among other deductions from the gross salary. In cases where the income tax is minimal or the employee's earnings fall below the taxable income slab, the net salary might be nearly equivalent to the gross salary.
The table below highlights the distinctions between gross salary and net salary:
| Parameters | Gross salary | Net salary |
| Definition | The total earnings an employee earns including benefits and allowances before tax deductions | The take-home salary amount of an employee after deducting insurance, provident fund, etc |
| Components | Includes basic salary house rent allowance, conveyance allowance, medical allowance and other allowances | Includes basic salary, house rent allowance and other allowances after deductions like income tax, provident fund, professional tax, are applied |
| Amount value | Represents the maximum salary amount before any deductions | Usually lower than gross salary due to deductions |
| Mode of calculation | Calculated by adding all earnings | Calculated by subtracting all types of deductions from the total earnings |
| Formula | Gross Salary = Basic salary + HRA + other allowances | Net Salary = Gross salary - (income tax + EPF + professional tax) |
Compare gross salary vs net salary vs CTC
The following table gives you a brief comparison of gross salary vs net salary vs CTC:
| Parameters | Gross salary | Net salary | CTC |
| Definition | It is the total salary amount before applying any deductions | It is the actual take-home salary after making all the necessary deductions | It is the overall expense a company incurs for an employee, including salary, benefits, allowances, contributions and taxes. |
| Components | Consists of basic salary, allowances, benefits, incentives, bonuses and contributions | Includes post tax deduction amounts of basic salary, allowances, incentives, benefits, bonuses | Comprises basic salary, benefits, allowances, incentives, statutory contributions, bonuses and taxes |
How to calculate gross and net salary from CTC?
Calculating CTC, gross salary and net salary is straightforward if you correctly identify all components.
Let us consider an example to understand the differences in calculations of CTC, gross salary and net salary. Assume you offer the following compensation package for a newly hired employee at your company:
| Salary component | Annual amount (in ₹) |
| CTC | 7,00,000 |
| Basic salary | 4,00,000 |
| House Rent Allowance | 1,50,000 |
| Conveyance allowance | 50,000 |
| Medical allowance | 42,000 |
| Perquisites (such as meal coupons) | 10,000 |
| Provident Fund (employer contribution) | 48,000 |
| Provident Fund (employee’s contribution) | 48,000 |
The employee’s CTC is the sum of all direct benefits, totalling ₹7,00,000.
To find the gross salary, subtract perquisites and employer’s PF contribution from the CTC.
Gross salary = ₹7,00,000 - (₹10,000 + ₹48,000)
Gross salary = ₹6,42,000
Next, to determine the net salary, assume the employee pays an annual income tax of ₹8,000.
Net salary = Gross salary - (Income tax + Employee’s PF contributions)
Net salary = ₹6,42,000 - (8,000 + 48,000)
Net salary = ₹5,86,000
Understanding the difference between gross salary vs net salary vs CTC helps employers get a clarity on how much they are investing in employees and helps them in budgeting. With Zoho Payroll, employers can clearly see the gross salary, net salary, and CTC amounts of employees separately. The payroll software reduces the time spent calculating employee salaries from CTC by automating the process, helping employers stay compliant and work efficiently.
Frequently asked questions
Which is bigger gross pay or net pay?
Gross pay is always higher than net pay as it reflects the total earnings before any deductions are made. Net pay, on the other hand, is the amount received after subtracting taxes and other deductions.
What is the difference between CTC vs in-hand salary?
CTC represents the total expense incurred by the employer by employing an individual, while the in-hand salary is the net amount received by the employee after all applicable deductions. CTC includes basic salary, allowances, gratuity, bonuses and other benefits whereas in-hand salary is the actual amount the employee takes home after all deductions such as taxes and statutory contributions are applied.
How to calculate net salary from gross salary?
Net salary is calculated by subtracting all mandatory and voluntary deductions from the gross salary.
