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What is net salary? Its meaning, components, and calculation
Net salary, also known as take-home or in-hand salary, is the sum an employee receives after all deductions are taken from their gross salary. It represents the true earnings from one's employment. In this article, you will learn about the net salary meaning, its different components, and how to calculate net salary.
Net salary meaning
Net salary is the amount deposited into an employee's bank account each month. This figure is the salary paid by a firm after deducting components such as EPF, professional tax, income tax, ESI and other deductions.
Some of these components, such as professional tax and ESI, do not apply to all organisations, as their applicability differs from state to state.
Knowing the difference between net salary, gross salary, and CTC (Cost to Company) is crucial. This helps in understanding the actual cost of employment and effectively managing compensation packages.
What are the different factors affecting net salary calculation?
- Industry sector: Different industries have different salary structures. For instance, the salary in a retail company will differ significantly from that in a technology firm. Consequently, net salary calculations will vary because some benefits may be provided by one industry but not by another.
- Company: The salary package offered to an employee is also influenced by a company’s policies, turnover and the demand and supply of its products. A salary offered to an employee in a multinational company will differ from a salary offered by a startup, affecting the net pay as well.
- Employee designation: An employee’s job role and designation also impact the pay structure. For example, a software developer's CTC will differ from that of a content writer, leading to variations in net salary.
- HR policies of a company: The HR policies of a company can significantly influence the pay structure. Some companies may offer a more employee-centric pay structure with higher basic pay and a range of employee benefits.
Components included in net salary
- Basic pay
Basic salary is a set amount paid to employees for their work. It is a fixed component of their compensation and usually varies based on their role and designation.
- HRA
House Rent Allowance (HRA) is given to employees to help cover the cost of renting a home. Employees living in rented accommodation can claim full or partial tax exemptions under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. However, if an employee is not renting a property, the HRA becomes taxable.
- Other allowances
These include additional allowances such as conveyance allowance, medical allowance, travel allowance and other different allowances which an employer provides to employees to cover their various work-related and personal expenses.
- Bonuses
Bonuses are a way for companies to show appreciation for employees' hard work and dedication. Businesses often share a portion of their profits with employees through bonuses as a reward for helping the company achieve its goals.
Components excluded in net salary
- Professional tax
A professional tax is a tax imposed by the government on individuals earning an income. While the exact amount varies by state, the national upper limit is set at ₹2,500 annually.
- Gratuity
This is a payment made to an employee upon leaving the company, serving as recognition for their service. Gratuity acts as a financial token for the services rendered during their employment.
- EPF contributions
Employees enrolled in the EPF scheme contribute 12% of their EPF wages to the fund. Employers are also required to match this contribution with an equal amount towards the EPF scheme.
- Income tax
This is calculated based on the employee’s taxable income and the tax slab rate the employee falls under. Certain aspects like leave travel allowances or telephone bill reimbursements can be exempt from tax. If your employee lives on rent and receives HRA, they can also claim exemptions on it.
How to calculate net salary?
The formula to calculate net salary is as follows:
Net salary = Gross salary - Deductions
In this net salary formula:
- Gross salary comprises your basic salary, allowances, bonuses and other forms of compensation.
- Deductions include various items subtracted from your gross salary. These can include professional tax, health insurance premiums, contributions to provident funds, income tax and any other mandatory deductions according to government regulations or company policies.
The following mentions the different salary components of an employee:
| Salary components | Amount |
| Basic salary | ₹1,40,000 |
| HRA | ₹90,000 |
| LTA | ₹60,000 |
| Special allowance | ₹60,000 |
| Gross salary | ₹3,50,000 |
| Deductions | |
| Employee Provident Fund | ₹21,600 |
| Insurance premium | ₹3,000 |
| Professional tax | ₹2,400 |
| Total deductions | ₹27,000 |
Net salary (Gross salary - Deductions) = ₹3,50,000 - ₹27,000 = ₹3,23,000
Therefore, the employee’s net salary is ₹3,23,000.
How to calculate net salary from gross salary?
To determine your net salary from gross salary, follow the steps mentioned below:
Step 1: Determine your gross salary and calculate income tax
Assuming a Karnataka based employee’s gross salary is ₹9,00,000 falls into the tax bracket where income between ₹7,00,000 and ₹10,00,000 is taxed at 10%:
Taxable income = ₹9,00,000 − ₹3,00,000 = ₹6,00,000 (NIL up to ₹3,00,000)
Taxes payable would be:
- 5% of ₹4,00,000 = ₹20,000 (between ₹3,00,000 and ₹7,00,000)
- 10% of ₹2,00,000 = ₹20,000 (between ₹7,00,000 and ₹10,00,000)
- Cess = 4% of ₹(20,000 + 20,000) = ₹1,600
Total tax payable = ₹40,000 + ₹1,600 = ₹41,600
Step 2: Calculate statutory contributions
Based on the above assumption, the employee’s monthly gross salary is ₹75,000. Let's assume they receive a basic salary of ₹40,000 per month and contribute 12% of this amount towards PF.
Monthly PF deduction = 12% of ₹40,000 = ₹4,800
Annual PF deduction = ₹57,600
Since they work in Karnataka, where professional tax is applicable, they will be paying an annual amount of ₹2,400 towards professional tax.
Step 3: Compute the net salary
Finally, subtract the total taxes from the gross salary to find the net salary.
Net salary = Gross salary − Total deductions
Net salary = ₹9,00,000 − (₹41,600 + ₹57,600 + ₹2,400)
Net salary = ₹7,98,400
Basic salary vs net salary
Basic salary is the fixed amount an employee receives before any additional compensation or deductions. It does not include bonuses, overtime pay or other forms of extra compensation. Basic pay is fully taxable and serves as the foundation for calculating other components of an employee's salary.
Net salary, on the other hand, is the amount an employee takes home after all deductions from the gross salary. To calculate net salary, you start with the gross salary including the basic salary, HRA, and other allowances and subtract mandatory deductions like income tax, EPF and professional tax. As a result, the net salary is usually less than the gross salary due to these deductions.
Key takeaways
Net salary is the amount employees receive after all deductions are made from their gross income. By knowing the components and deductions involved, employers can provide clear salary breakdowns, and help employees understand their take-home pay. This will allow employees to manage their household expenses, savings and other financial obligations better.
Frequently asked questions on net salary
What is the meaning of net monthly salary?
Net monthly salary is the amount you receive every month after deducting various items from your gross salary. These deductions include income tax, professional tax, Provident Fund (PF) and other company deductions.
What is net pay in salary?
Often referred to as take-home pay, net pay is the amount an employee receives after all payroll deductions have been subtracted from their gross salary. For instance, if an employee has a gross monthly salary of ₹50,000 and faces deductions of ₹9,000 for taxes and statutory contributions, their net pay would be ₹41,000.
Are net salary and in-hand salary the same?
Yes, net salary is the same as in-hand salary. It is the actual amount credited to your employee's bank account every month.
