Understanding Gross Salary: Meaning, Components, and How to Calculate Accurately

Last Updated : May 5, 2023, 3:35 p.m.

Whenever you work for any institution or enterprise, they pay you for the same. However, the previously promised amount and the amount you finally receive can differ. There are different salary structures; understanding each is essential to plan your finances accurately. The salary structure in question today is the gross salary. This article will answer the basic questions associated with gross salaries, like what gross salary is, its different components, and how you can calculate your gross salary.

Definition of Gross Salary

Before we dive further into the topic, we must first learn the gross salary meaning. Suppose a particular amount was promised to you when you got a job offer. The promised amount, commonly called the Basic Salary, along with other benefits, including direct and indirect benefits, make up the gross salary. Deductions are made from the gross salary in the form of taxes and provident funds before you receive your take-home salary or the net salary.

Note that not every single benefit is not a component according to the gross salary meaning.

Components of Gross Salary

There are various benefits provided by the institution or organisation you work for, along with the basic salary. Many of them are calculated as part of a gross salary. Let us elaborate on some of these gross salary components below.

• Perquisites – The benefits offered to the employee on top of their basic allowances and salary are called perquisites. Perquisites may include the salary of the hired help at employees’ houses, electricity bills, water supply, gas bills, and more. These amounts can be tax exempted as well as taxable.
• HRA (House Rent Allowance) – HRA, as the name suggests, covers an employee’s housing or accommodation services. If you are renting a place, you can claim your house rent allowance according to your company’s policy. These perks are included in yours. As per the gross salary meaning, you don’t have to worry much about your accommodation costs in a big city.
• Basic Salary – Basic Salary, as mentioned previously, is the salary free of all benefits, taxes, or deductions. This is the promised amount. It is paid directly to the employee.
• Provident Fund or PF – Generally, 12% of the employee’s basic salary is contributed to the employee provident fund, commonly known as EPF. This (EPF) scheme was introduced under the supervision of the government of India to ensure monetary assistance to an individual after retirement.
• Bonus – We often hear this term in the gross salary meaning. As an incentive, sometimes an employee receives something extra as an appreciation for their work. That is called a Bonus.

The Excluded Components

Not all the benefits are included in the gross salary meaning that some advantages do not constitute a component of one’s gross salary. While all of the previously mentioned components constitute a person’s gross compensation, some benefits, which appear to be benefits on the surface, are not included in the components.

While learning the gross salary meaning, we will exclude the following components.

• Gratuity – Gratuity usually is given to the employee who has contributed to the organisation for at least five years.
• Free meals: Meals are provided at an individual’s workplace without any charges.
• Compensation for medical costs: Employees may receive financial assistance from their employer for medical purposes.
• Leave Travel Allowance (LTA) – The LTA covers the cost of the employee and their family’s travelling expenses. Note that the actual travel cost is covered under tax exemption policies. However, other charges like dining, accommodation, and shopping might not be included for tax exemption.

Calculation of Gross Salary

Gross salary is calculated by adding the employee’s basic salary and all the benefits and reimbursements. Let us calculate it with the help of an example to understand it better.

Suppose the following is the layout of a person’s salary.

Now, according to gross salary meaning, all these components should add up to get the exact amount of gross salary obtained by the person.

Gross Salary = Basic Salary + Bonus + Transport Allowance + House Rent Allowance (HRA)

Gross Salary = 25,000 + 2,062 + 1,500 + 11,000 = 39,562.

While calculating the total salary, the Provident Fund is not considered. It also remains unaffected by income tax because the calculation is done before any deductions. The amount after the tax deduction is called net salary.

Salary Taxation

When you search for gross salary meaning, another essential factor to pop up is the income tax.

1961’s Income Tax Act of 1961 states that the two kinds of taxes applicable in India are direct taxes and indirect taxes. The individual pays direct tax to the government. It includes taxes like property tax, wealth tax, etc. On the other hand, indirect tax is paid to the government through an intermediary. GST, implemented by the government of India in 2017, acts as a comprehensive indirect tax. The rate of income tax varies according to different income tax slabs.

Conclusion

Knowing the gross salary meaning is essential for an employed person. The information above might have given you a clear idea about how the concept of gross salary works and how it differs from basic and net salary.

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