What is Net Salary?Difference between Gross Salary and Net Salary

Net salary

Net salary is the ‘take home’ salary of an employee after statutory deductions such as taxes are made from the gross salary. Net salary is the amount an employee receives after the statutory deductions. Net Salary is the actual amount which is credited to the bank account of an employee. Income Tax is based on the Gross Pay of an employee.

Difference between Gross Salary and Net Salary

CTC= Gross Salary+PF+ESIC+Leave Pay+Gratuity. Gross salary includes both taxable and nontaxable income. It is, therefore, the sum of components prior to deductions.

Gross salary may include the following

  • Basic Salary
  • Dearness Allowance
  • House Rent Allowance
  • Conveyance Allowance
  • Medical Reimbursement Allowance
  • City Compensatory Allowance
  • Performance Incentives
  • Leave Travel Allowance
  • Food Allowance
  • Any Other Allowance depending upon the company

Certain deductions are made from your salary as listed below

  • Employee PF Contribution of 12%
  • Employee ESIC Contribution
  • Professional Tax (state-specific)
  • Income Tax

When the aforementioned deductions are made from the Gross Salary, the remaining amount is known as Net Salary. It is the take home salary of the employee.

Net Salary = Basic + Additions (bonuses, allowances) – Deductions.

How to Calculate Net Salary?

Salary Component Amount Taxable Amount
Basic salary 2,20,000 2,20,000
House rent allowance 60,000 36,000
Conveyance allowance 8000 0
Medical Reimbursements 9000 0
Gross salary 2,97,000 2,56,000
Medical insurance 2500
PF (12% of basic salary) 26,400
Benefit 28,900
CTC (benefit + gross salary) 3,25,900

Below is a break-up of take home salary:

Deductions Amount
Tax (10% of taxable amount) 25,600
Employee provident fund (12% of basic salary) 26,400
Professional tax 2500
Total deduction 54,500
Gross salary 2,97,000
Net salary 2,42,500

How to calculate HRA

Salary – Rs. 30,000 per month (the basic salary will be considered in this case since there is no commission or dearness allowance) HRA provided by company – Rs. 13,000 per month 10% of basic salary (10% of annual basic salary) – Rs. 36,000

Now we calculate the three scenarios:

  • Amount received as HRA from employer = Rs. 13,000 X 12(months) = Rs. 1,56,000
  • Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000
  • 50% of basic salary since he lives in a metro = Rs. 1,80,000

In the case of Ravi, it is evident that the HRA amount which will be exempt from tax will be Rs. 84,000 because that is the amount that is the least of the three scenarios.

HRA claim rules

The following rules are applicable for HRA claims:

  • The HRA cannot exceed more than 50% of your basic salary.
  • You cannot claim for the full rental amount you are paying. The exemption is based on the least of the following options:
  1. The actual amount allotted by the employer as the HRA.
  2. Actual rent paid less 10% of the basic salary.
  3. 50% of the basic salary, if the employee is staying in a metro city (40% for a non-metro city).
  • You can take advantage of tax benefits of HRA along with a home loan.
  • If you are staying with your parents, you can pay rent to your parents and collect a receipt for HRA claim. However, the rules don’t allow you to pay rent to your spouse.
  • The landlord’s PAN card is mandatory for rent exceeding Rs.1,00,000 per year. The landlord can provide a self-declaration in case if he/she doesn’t have a PAN card.
  • If your landlord is an NRI, you must deduct 30% tax from the rent amount that needs to be declared.