We are going to discuss how salary is calculated in India so that it is simple to understand and calculate the take home salary. Salary is an essential component of everyone’s life just like food and water. Hence, one must know what they are receiving and how their take home salary is different from CTC.
Basic Terms of Salary
CTC – Cost to Company is the total amount a company spends on a employee. It is a combination of basic pay, reimbursements, allowances, HRA etc. The CTC consists of Gross salary, Provident Fund and Gratuity.
Basic Salary – Basic salary is decided by the company for an individual depending on their designation and skill set. It is part of CTC package.
Gross Salary – Gross salary is the combination of basic salary and other allowances before deduction of taxes. It also includes bonus pay, PF , holiday pay etc.
Net salary or take home salary is the salary that is the amount an individual takes home after the deductions of taxes and PF from their Gross Pay.
Allowances – Allowances is an amount received by employee for providing services that meets company’s business objectives. Below are types of allowances provided depending on the kind of job.
HRA – House Rent Allowance – It is the amount paid to employees for rent and accommodation.
LTA – Leave Travel Allowance – Usually in government related jobs, LTA is the amount provided by company for domestic travel expenses related to rent or accommodation.
DA – Dearness Allowance is living allowance provided to employee to balance out the inflation in the market.
Medical Allowance is the amount paid to the employee to cover for medical expenses. This amount and the medical plan varies from company to company.
Reimbursements – Occasionally employees are entitled to several reimbursements such as work travel, phone bills, newspaper bills, etc. The amount is received by the employee when they submit the receipts.
Gratuity is the amount paid to the employee for providing the services to the company. It is usually paid at the end of the service of the employee and the employee should be in a company for a minimum of 5 years to claim gratuity.
Provident Fund (PF or EPF) is the amount an employee and the employer invest to secure the retirement benefit scheme for the employee.
Calculation of Salary
Let us now calculate the net salary an individual will take home
Step 1: Calculate Gross Salary. Gross Salary = CTC – (EPF + Gratuity).
Step 2: Calculate all the taxable income
Taxable Income = Gross Salary – Deductions.
Deductions include allowances, HRA, medical bills, LTA and tax saving investments.
Step 3: Take Home Salary = Gross Salary (Basic Salary + HRA + Special Allowance) – Income Tax – EPF
The income tax percentage is calculated based CTC defined by Indian government tax federation. The other type of tax is Professional Tax deducted in some states as to let the employee conduct their business in the area. The professional tax is not levied in Union territories and certain other states like Arunachal Pradesh, Haryana, Himachal Pradesh, Jamm and Kashmir, Nagaland, Punjab, Rajasthan, Uttrakhand and Uttar Pradesh.
Thus, knowing the terminology of how our salary is composed will help understand and make our take home salary calculation simple.