Difference between Net Salary and Gross Salary
Last Updated :
27 Oct, 2023
Net Salary and Gross Salary: Gross salary is the total amount received by an employee without any tax deductions whereas Net salary is the total amount of money that an individual takes home after all kinds of deductions have been taken out. You can calculate it by the following formula given by Net Salary = Gross Salary – All kinds of deductions such as income tax, pension, etc. You can say “Net salary is the take-home salary”.
A salaried individual must have come across gross Pay and net pay terms. For new joiners Managing payroll becomes an overwhelming task. So having an idea about these terms helps in negotiating as well as avoiding HR mistakes that startups generally make.
In this article, we have covered Net pay and gross pay, different types of salary, payroll, and income, and formulas for calculating your in-hand salary, and more.
Difference between Net salary and Gross Salary
What Is Net Salary?
Net salary is the total amount you receive after all the deductions from your cost to company (CTC), such as income tax, professional tax, Public Provident Fund and other items. It is the amount which comes after subtraction of various benefits. Thus, Net salary is also known as in-hand salary or take home salary.
Examples of Net Salary
Net salary examples includes the gross income after TDS, PPF, professional tax, pension and other kind of deductions.
Following are the formula for calculating the Net salary:
Net Salary = Gross Salary – Professional Tax – Public Provident Fund – Income Tax
What Is Gross Salary?
Gross salary is the total pay that an employee receive before taxes and other kind of deductions. In a common man’s language gross salary is the total amount that will be given to the employees before any kind of deductions by any company or employer. The term gross itself means without any deductions. Thus the salary is given to the employees without any tax deductions.
Examples of Gross Salary
Examples of gross Salary includes bonuses, holiday pay, overtime pay, and many other different items.
Formula to Calculate Gross salary
Following are the formula for calculating the Net salary:
Gross salary = Basic salary + HRA + Other allowances
Components of Gross Salary
The following are components constitute gross salary:
1. Basic salary
This is the amount which does not include any other kind of benefits such as bonuses, incentives etc.
2. House Rent Allowance (HRA)
The amount that is paid to employees for covering their housing expenses, is called House Rent Allowance. This amount is depend upon the area. For metro cities it is more (in India) and for Tier-2 cities it is less.
3. Provident fund contribution
The amount that is contributed in the Employment Provident Fund. It is 12% of the basic salary. In organised industries its is mandatory.
What is the Employee Provident Fund (EPF)?
The Employee Provident Fund (EPF) is a saving. It is introduced by EPFO. The scheme aims to provide social security and to save up a sufficient corpus for retirement. It is a tax free instrument for salaried people.Under this scheme, the employee and the employer both has to make certain contributions every month towards the EPF scheme.
4. Special allowance
Any other kind of allowances that include transport, conveyance, and outstation bearings, among others come under the special allowances.
5. Perquisites
Benefits which being given over and above the basic salary is called perquisites. Most often, these are monetary components. However, there could be non-monetary components also.
6. Bonus
When the employee is awarded by some amount for his performance in the company.
Difference Between Gross Salary and Net Salary
The following is the difference between Gross Salary and Net Salary:
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Amount that an employee can get before any kind of deductions of any tax.
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Take home salary, meanings the amount an employee is able to get after all kind of deductions.
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House Rent Allowance, Conveyance Allowance, and Medical Allowance etc.
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Income Tax, Professional Tax, Provident Fund, Pension, etc.
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Maximum amount of the salary that includes all taxes.
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It is always a lower amount than gross pay.
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Calculated by adding all payments.
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Calculated by subtracting penalties and compulsory taxes.
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Gross Salary = Basic Salary + House Rent Allowances + Other Allowances
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Net Salary = Gross Salary – Applicable Deductions
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Through gross income, individuals get holiday pay, incentives, etc.
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In the case of net income, individuals need not pay tax at different levels.
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Difference between Gross pay vs. net pay
Gross pay is the total amount that given to the employees before taxes, benefits and other payroll deductions Where as Net pay is the amount remains after all deductions. It is also called take home pay.
How To Calculate Gross Pay
- Hourly workers: Multiply the hourly wage by the number of hours You worked within a pay period. If you worked more than 40 hours in a week, don’t ignore to include the overtime pay rate for your extra hours.
- Salary workers: Divide the yearly salary by the number of pay periods in a whole year.
- If workers are paid monthly, that is known as 12 pay periods
- Twice monthly: 24 pay periods
- Weekly: 52 pay periods
- Biweekly: 26 pay periods
If employees are owed board, reimbursements or bonuses certainly add the amount owed to their wages to get their overall gross pay.
How To Calculate Net Pay
You can calculate your net pay by starting with gross pay salary divided by the number of pay periods in the year. and Then, subtract deductions, including:
- Health insurance premiums
- 401(k) or other retirement contributions
- Federal, state and local income taxes, including additional withholdings noted on their W-4
- Payroll (FICA) taxes
- Court-ordered wage attachments
How to manage payroll
Regardless of how an employer chooses to manage payroll, there are several basic steps that apply to most methods:
- Collect and update employee data
Collect and update the data of your employee You can take consideration of information of employee like Social Security numbers, tax withholding certificates, benefit enrollment deductions and worker classifications etc.
- Calculate gross pay
Calculate the gross pay, You can calculate it by tracking the total hours that employees work and multiply it by hourly rate. The process is a bit easier for excused, salaried workers. Simply, divide the annual salary by the number of pay periods.
- Calculate net pay
You can calculate your net by deducting any pretaxes to benefits from gross pay.
- Determine employer payroll tax contributions
As Employers are fully responsible for paying half of the FICA tax in total, unemployment taxes. There are also other state and local payroll taxes, Which depends on particular area.
- Keep accurate payroll records
According to government businesses save their payroll records for at least three years.
Net Salary and Gross Salary – FAQs
1. What do you mean by Gross salary?
Gross salary refers to the total amount released before any kind of deductions by the employer of a company towards employees.
2. What do you mean by Net Salary?
Net salary refers to the amount that salaried individuals receive after various kind of tax deductions and contributions (PF).
3. What are the components of Gross salary?
Various components of the gross salary are House Rent Allowance, Conveyance Allowance, and Medical Allowance etc.
4. What are the components of Net salary?
The components of net income include Income Tax, Professional Tax, Provident Fund, Pension, etc.
5. Which is more net pay or gross pay?
Typically, Gross pay is more than net pay as it consists of the employee’s total salary before any deductions. Since net pay is the payable salary, post-tax and other deductions, In general it tends to be lower than gross pay.
6. Does gross salary mean in hand salary?
Gross salary is the amount that remains after subtracting gratuity as well as EPF from the CTC.
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