The amount received post subtracting gratuity and the employee provident fund (EPF) from Cost to Company (CTC) is called as Gross Salary. In other words, Gross Salary is the amount paid before deduction of taxes or deductions and is inclusive of bonuses, over-time pay, holiday pay etc.
The EPF, in India, is an employee-benefit scheme recommended by the Ministry of Labour which provides employees with an income during their retirement years. The EPFO or Employee Provident Fund Organization has the authority to mandate policies on EPF, pension, and insurance schemes. However, the employer is required to contribute at least 12% of the employee’s salary towards his/her EPF.
An Employee can also withdraw the full amount accumulated in his/her PF account at the time of retirement, which is when the employee attains the age of 55 years. Although, he/she can also withdraw the PF amount in case of the following situations:
PF calculated on Gross Salary
The calculation of Gross pay for the purpose of PF calculation is different than that used in the payroll context. Let us consider PF Gross to denote the salary to be considered for PF calculation.
PF Gross includes Basic, DA, Conveyance, Other Allowance etc. (heads of pay which are included for PF calculation). It excludes House Rent Allowance, Bonus etc. (heads of pay which are excluded for PF calculation) as per the provisions of the PF Act.
Deductions from Gross Salary
To calculate Income Tax, gross salary minus the eligible deductions are considered. For instance: you will have to subtract HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.
Please note: The taxation process is different for self-employed and salaried individuals.
Gross Salary under Section 17(1)
As per section 17(1), salary includes the following amounts received by an employee from his employer, during the previous year.
Wages
Any advance of salary
Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages
The contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in Section 8OCCD.
Any payment received by an employee in respect of any period of leave not availed of by him; (Leave encasement or salary in lieu of leave).
The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognized provident fund to recognized provident fund.
The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule.
Example of Gross Salary and Net Salary
Sumit works as a Marketing manager with ABC Group Ltd. His gross salary per month is Rs.70,000 while his net-take home is just Rs. 56,000.
Salary Components
Basic Salary = Rs.25,000
HRA = Rs.20,000
LTA = Rs.10,000
Travel Allowance = Rs.15,000
Total = Rs.70,000
Deductions:
Provident Fund – Rs. 3000
Income Tax - Rs. 1500
Profession Tax - Rs. 500
Loan Deduction - Rs. 9000
Total Deductions - Rs. 14,000
Therefore, Net Salary = Gross Salary – Deductions = Rs.70,000 – Rs.14,000 = Rs.56,000.
Taxation Process of Gross Salary
To calculate Income Tax, gross salary minus the eligible deductions are considered. For instance, you will have to deduct HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income.
