How to Calculate Gross Salary or CTC
You would have heard terms like gross salary, net salary, and CTC. These terms might be confusing, especially if you’re in the beginning phase of your career. It is important to know these terms when you are discussing your salaries.
In this article, let’s look closer at learning these terms and using the formulas to calculate the gross salary or CTC.
What is your Gross Salary?
Your gross salary is the aggregate amount of compensation paid by your employer. In other words, a gross salary is the amount you receive before any deductions like taxes or provident fund contributions. This aggregate compensation is the cost to the company or CTC.
Gross Salary vs. Take-Home Salary
The cost to the company is the total amount your employee spends on you; it is the amount you receive before deductions of any kind. However, employees do not receive their entire CTC and receive an amount after many deductions, like their employer’s provident fund, contributions, bonuses, health benefits, food coupons, professional tax, and provident fund. The amount received after all these deductions is called the take-home salary.
Different Components of Gross Salary
Determine your basic salary
The basic salary is not subjected to any deductions, nor does it qualify for any exemptions. It is the part of an employee’s CTC that excludes all allowances and perks available to the employee. The basic salary usually constitutes 40-50%of your gross salary. Your basic salary forms the foundation for the CTC calculation as it is a fixed component.
Perks
The benefits provided to an employee in addition to their basic salary and allowances. These perks can be monetary or non-monetary benefits payable in addition to the salary and allowances to an employee.
House Rental Allowance
Many companies offer house rent allowance to their employees to meet the cost of living in rented property. Usually, the house rent allowance is a tax-free component. The HRA amount may vary depending on the salary and the location of the employee.
Leave Salary or Leave Encashment
Employees are allowed to take leave during their service period. If employees do not utilise this leave, it may either lapse or can also be accumulated in the future. Employees are also allowed to encash their unused leaves at the time of termination or retirement. The payment received for the encashment of unused leave would form part of the salary.
CTC Calculation Example
Gross salary = Basic salary + HRA + Other allowances
Net salary = Gross salary – Income tax – Provident Fund – Professional tax
Let’s say that Arfath has applied to Firm A for a job and received a pay package, of which the details are given below:
Salary Component | Amount (Annual, INR) |
CTC | 7,00,000 |
Basic Salary | 5,00,000 |
Travel Allowance | 50,000 |
House Rent Allowance | 45,000 |
Medical Allowance | 45,000 |
Leave and Travel Allowance | 60,000 |
Provident Fund Contribution | 84,000 |
Gratuity | 29,629 |
Now, Arfath’s CTC is the total of all the direct benefits listed, which amounts to INR 7,00,000. Subtract that amount by the gratuity and PF contribution to arrive at the gross salary.
So, as per the gross salary formula:
Gross Salary = 7,00,000 – (84,000 + 29,629) = INR 5,86,371
Now, subtract from this value, the total income tax, which is calculated at 5% from INR 2.5 lac to 5 lac and 10% from INR 5 lac to 7.5 lac.
Net Salary = 5,86,371 – 33637 = INR 5,52,734
Understanding gross salary and CTC empowers you to negotiate effectively and make informed financial decisions. Remember, CTC is a headline figure, while your take-home pay is what truly matters.
Following the steps outlined in this guide, you can accurately compute gross salary and CTC, ensuring fairness and compliance in salary structures.
