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Net Salary

What is Net Salary?

Net Salary, also referred to as the Take Home Salary, is the amount that gets credited to an employee’s salary account on a monthly basis (or weekly, depending on the terms of the employment contract). This sum is given by the organization, in which the individual is employed in, after the employer has subtracted deductions like professional tax, EPF, etc.

It is crucial to take note of the net salary at the time of salary calculations. Net salary is the actual figure that an employee gets towards his services provided to the organization. The payment received can be utilized for managing costs such as household expenses, EMIs, travel expenditure, etc. When a CTC offer is made to a potential employee, the individual must enquire of the net salary. Often times, many of the components listed in the salary structure can appear puzzling. An employee should understand the difference between net salary and gross pay with respect to the CTC offered. Should the CTC be large, while the net salary seems quite low, it can lead to financial problems for the employee in the future.

How to Calculate Net Salary?

The formula to calculate net salary is quite simple. Net Salary = Gross Salary - Deductions.

Gross salary can include the following:

  • Basic Salary

  • Conveyance Allowance

  • Employer’s PF Contribution

  • Overtime Pay

  • Bonus

  • Medical Reimbursement Allowance

  • Dearness Allowance

  • House Rent Allowance

  • City Compensatory Allowance

  • Performance Incentives

  • Food Allowance

  • Leave Travel Allowance

  • Any Other Allowance

Some of the deductions made from the salary include:

  • Employee’s PF Contribution

  • Professional Tax (state-specific)

  • Income Tax

How is Net Pay different from Gross Salary?

Gross pay is the amount that is paid to an individual by an employer prior to any deductions being made. Gross salary can be calculated by adding up basic salary, employer’s PF contribution, conveyance allowance, medical reimbursement allowance, dearness allowance, house rent allowance, food allowance, leave travel allowance and any other allowance. It must be noted that gross salary does not factor in any of the deductions made. In other words, it is the salary paid after totalling all benefits and allowances, but before making deductions like employee’s contribution to provident fund (EPF) and taxes.

Net pay is the take-home pay that is left after allowable deductions have been subtracted. These deductions include gratuity, EPF, superannuation, professional tax and income tax or TDS (Tax deducted at Source), among others. It should be noted that when compared with gross salary, the amount calculated as net salary will be lower on account of the various permissible deductions.

How is Net Salary different from Basic Pay?

Basic salary is the amount that an individual receives prior to any extras being added or payments deducted. An employee’s basic salary does not include bonuses, overtime pay or any other potential compensation from an employer, neither does it factor in any of the deductions made like professional tax, TDS, etc. Basic pay is completely taxable.

On the other hand, net pay is what an employee takes home after all the required deductions are made from the gross salary. It can be computed by first adding up basic salary, HRA and allowances, and then deducting income tax, EPF and professional tax from it. The net salary will be less than the gross pay on account of mandatory and voluntary deductions. The entire amount of basic salary is part of the take-home salary.

Frequently Asked Questions

What does net salary mean?

Net salary, also known as the take home salary, is the amount which gets credited to the employee’s salary account on a monthly basis (or weekly, depending on the terms of the employment contract). This sum is given by the organization after subtracting deductions like professional tax, EPF, etc.

What is the difference between gross pay and take-home salary?

Gross pay is the amount of salary paid to an individual by an employer before any deductions are made. Gross salary can be calculated by adding up basic salary, employer’s PF contribution, conveyance allowance, medical reimbursement allowance, dearness allowance, house rent allowance, food allowance, leave travel allowance and any other allowance. It must be noted that gross salary does not factor in any of the deductions made. Net pay is the take-home pay that is left after allowable deductions have been subtracted. These deductions include gratuity, EPF, superannuation, professional tax and income tax or TDS (Tax deducted at Source), among others.

What is net monthly pay?

Net monthly pay is the actual amount an employee earns on a month-on-month basis, after the employer has made all deductions from the gross income.

What are the steps to calculate take-home salary?

To compute the take-home salary or net salary, follow the steps mentioned below:

Step 1 - Calculate the gross salary

Step 2 - Assess the taxable income

Step 3 - Calculate income tax by applying income tax rates

Step 4 - Calculate the take-home salary

What are the common deductions an employee can find in his or her salary slip?

The primary deductions that employees can find in their salary slip include professional tax, income tax and provident fund (the employee's contribution).

What is the formula to calculate net salary?

To find out the net salary earned, put the following formula to use:

Net Salary = Basic Salary + Allowances + Bonus/Compensation - Income Tax - EPF - Professional Tax

Note-

  • Allowances can include House Rent Allowance, Leave Travel Allowance, Conveyance Allowance, Dearness Allowance and other such allowances.

  • The amount of tax paid by an employee depends on which income tax slab he or she falls under.

Read More About Tax

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