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Net Salary or more commonly referred to as take-home salary or in-hand salary, is the amount or income that an employee actually takes home after tax, provident fund and other such deductions are subtracted from it. Net Salary is different from Gross Salary and is lower than the latter. It can be equal in cases where income tax is 0 and when the salary that the employee is earning is less than the government tax slab limits. Read more to know about net salary in detail, including its formula, calculation and more.
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Formula for Calculating Net Salary (Take Home Salary)
The formula for calculating Net Salary is:
| Net Salary = Gross Salary – Professional Tax – Public Provident Fund – Income Tax |
There are many steps involved in calculating the net salary as follows:
Step 1- Know your CTC
Step 2- Calculate your Gross Salary
Step 3- Calculate taxable income
Step 4- Calculate income tax
Step 5- Calculate in-hand or Net Salary by using the formula
How to Calculate Net Salary?
Given below is the step-by-step procedure to calculate the Net Salary(In-hand Salary). Initially, you must calculate the Gross Salary. Gross salary is neither your Cost to Company (CTC) or basic salary. Gross salary can be obtained by subtracting the Gratuity and the Employees’ Provident Fund (EPF) from the CTC.
Gross Salary = CTC – EPF – Gratuity
Calculation of Gross Salary
To get your gross salary, you must subtract the EPF and Gratuity from the CTC. For example, the gross salary of X employee getting CTC of Rs. 4 lakh is-
Gross Salary= Rs. 4 lakh – (Rs. 21,600 – Rs. 18,326)= Rs. 3,60,074
The formula for the calculation of Gratuity is mentioned is Gratuity = Basic salary x Dearness Allowance x 15/26 x Number of years of service. The Gratuity that is subtracted on a yearly basis = 15/26 x Basic Salary (per month).
Calculation of Taxable Income
Since net salary is the take-home salary after paying your income tax, you must know your tax slab and calculate the taxes you will have to pay.
Here in the above case, X is getting a gross salary of Rs. 3,60,074. From Rs. 2,50,000 to Rs. 5,00,000, taxes will be charged as 5% of the total income that is more than Rs. 2.5 lakhs plus 4% cess.. Hence, X’s taxable income will be:
Taxable Income: Rs. 3,60,000 – Rs. 2,50,000 = Rs. 1,10,000.
Hence the total taxes payable will be:
- 5% of Rs. 1,10,000 = Rs. 5,500
- 4% cess of the income tax payable= Rs. 220
- Total Tax Payable= Rs. 5,720
Calculation of Net Salary
The Net Salary of X will be:
Net salary= Gross Salary – Taxes paid
Net Salary of X= Rs. 3,60,000 – Rs. 5,720 = Rs. 3,54,280.
Please note that while calculating the net salary, the Professional Tax must also be deducted. The maximum Professional Tax that can be deducted in a year is Rs. 2,500. Therefore, approximately Rs.200 can be deducted on a monthly basis as Professional Tax.
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Difference between CTC and Net Salary
The difference between CTC (Cost to Company) and Net Salary is very simple to understand.
| CTC | NET SALARY |
| CTC is simply “Cost to Company” i.e. in the total calculation of salary package including all monetary & non-monetary benefits spent on an employee by the company without any tax deductions. | Take-Home Salary or Net Salary is the total salary that an employee gets after all necessary tax and other deductions are made. It is the income that the employee actually takes home. |
Difference between Gross Salary and Net Salary
| GROSS SALARY | NET SALARY |
| Gross Salary is the amount of salary after adding all benefits and allowances but before deducting any tax | Net Salary is the amount that an employee takes home |
| Gross salary includes benefits like HRA, Conveyance Allowance, Medical Allowance, etc. | Net Salary = Gross salary – All deductions like Income Tax, Pension, Professional Tax, etc. It is also known as Take Home Salary |
| Gross Salary is the maximum amount of the salary inclusive of all taxes. | Net Salary is less than the Gross Salary amount after deducting all taxes. |
| Gross Salary is obtained from CTC after deducting EPF. | Net Salary is obtained from Gross Salary after necessary deductions and Income Tax. |
How to use Net Salary and Gross Salary for filing Taxes?
When it comes to filing taxes, you should know both your gross and net income. The figure you use will depend on the form you are filing. For example, if someone is asking for your income, you would include your gross pay. A lender, on the other hand, would want to know your net pay since this is the amount you will actually have in your bank account to use and pay off a loan. It is also important to note that the amount of money you could end up owing after filing your tax return will depend on your deductions. For example, if you claim more exemptions, there is a chance that you will owe more money after filing.
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Frequently Asked Questions (FAQs)
Does CTC include PF?
Cost to company(CTC) includes all detailed costs incurred on an employee, including the Employer’s contribution to the Provident Fund. CTC can be calculated using the following formula:
Cost to Company = Gross Salary + PF + Gratuity.
How do you calculate monthly take-home salary through a salary calculator?
You can calculate take-home salary by deducting income tax, employees provident fund, professional tax from gross salary.
What is the difference between CTC and Take-home salary?
CTC implies Cost to Company which includes all monetary and non-monetary benefits spent on an employee by the company and take home salary is the salary the employee takes home after all deductions.
How is net salary calculated?
Net Salary = Gross salary – All deductions like income tax, pension, professional tax, etc. Net salary is also referred to as Take Home Salary.
Is net salary monthly?
Net income is the amount of a person’s paycheck that remains after the employer withholds taxes and deductions. Net monthly income refers to a person’s take-home pay on a monthly basis.
What is basic salary pay?
Basic salary is the base income of an individual. Basic salary is the amount paid to employees before any reductions or increases due to overtime or bonus allowances.