What is Gross Salary? Components and Calculation Process

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Gross Salary

Gross Salary is the total earnings an employee receives before any deductions are made. Your gross salary plays a huge role when you’re budgeting or filing taxes. 

Understanding the exact breakdown of your gross salary, its components and its structure is essential for managing your finances effectively, which is what we’re going to cover in this article. 

What’s Included In Gross Salary? 

These are the components that form part of gross salary:

1. Basic Salary

The basic salary is the fixed amount payable to an employee before any allowance or perquisites are added. The basic salary is not subject to any deductions.

2. House Rent Allowance (HRA)

HRA is a major salary component of the gross salary structure. It is an allowance that covers the housing expense of an employee. This is applicable to both salaried and self-employed employees.

3. Special Allowances

Special allowances are a fixed amount allocated to an employee over the basic salary to meet different needs. This includes conveyance allowance, transport allowance, children's education allowance, outstation allowance, etc.

4. Perquisites 

Perquisites are benefits provided to an employee over and above their basic pay These benefits can be taxable or non-taxable depending on their nature. 

Some of these benefits include the supply of gas, water, and electricity.

5. Special Arrears

Arrears are the amount that an employee gets on an increment in salary or backdated pay adjustment. When an employee receives a salary raise that is applied retroactively, then the difference for the previous months is arrears.

6. Bonus

Bonus is a performance-based incentive given to employees. Bonuses are added to gross salary when they are paid, temporarily increasing the gross salary for that month or period. There are many types of bonuses like performance, profit-sharing, retention, referral, etc.

Components Excluded From Gross Salary

There are certain components that do not form part of gross salary, such as:

  • Travel Reimbursement
  • Medical Reimbursement
  • Gratuity
  • Insurance Premiums
  • Fringe Benefits

Deductions From Gross Salary

Certain deductions from the gross salary are made to arrive at the net or take-home salary. These deductions include:

  • Income Tax - These are taxes levied by the government on the income earned by an employee.
  • Insurance Premiums - Insurance premiums include health and life insurance costs covered by the employer for their employees. 
  • Professional Tax - This is a tax levied by the State Government of India on salaried employees.
  • Provident Fund - This forms part of a retirement savings scheme where both employer and employee contribute a small percentage of the basic pay.

How To Calculate Gross Salary?

To calculate your gross salary, you need to include all the components that fall under gross salary. 

Let’s understand this with an example. Let's suppose, Shivam who works in marketing has these salary components:

Basic Salary ₹30,000
House Rent Allowance₹12,000
Special Allowances ₹5,000
Performance Bonus₹15,000

Shivam’s gross salary will be the sum total of all the components, i.e; ₹62000.

Difference Between Gross Salary & Net Salary

Point of DifferenceGross SalaryNet Salary
MeaningIt is the monthly or yearly amount payable to an employee before deductionsIt is the monthly or yearly amount payable to an employee after deductions
ComponentsBasic salary, allowances, bonusGross salary minus tax deductions, provident fund
CalculationGross salary = Basic salary + Allowances + HRANet Salary = Gross Salary - Professional Tax - Income Tax - Provident Fund

Difference Between Gross Salary & Basic Salary

Point of DifferenceGross SalaryBasic Salary
MeaningIt is the monthly or yearly amount payable to an employee before deductionsIt is the fixed amount before any addition or deductions
ComponentsBasic salary, allowances, bonusStandalone fixed amount

Final Thoughts

It is extremely important to understand the structure of your gross salary as it helps in planning for taxation and budgeting. By gaining clarity on the difference between gross and net salary, one can understand their tax deductions and implications better.