Meaning of Net Salary, Gross Salary and CTC Salary

 

Friends,This post of mine is to make the fresher's understand the meaning of different notions of word Salary.  This I wanted to write to educate the freshers to learn about the difference between CTC Salary and what they get it in hand.

Meaning of Salary  - http://en.wikipedia.org/wiki/Salary "Salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract."  Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in stages at fixed intervals, for example, monthly payments of one-twelfth of the annual salary.

Salary can also be viewed as the cost of acquiring human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.   

Salary is determined by market pay rates for people doing similar work in similar industries in the same region. Salary is also determined by the pay rates and salary ranges established by an individual employer. Salary is also affected by the number of people available to perform the specific job in the employer's employment locale. 

The Employer aims to provide a salary which fairly recognizes the relative worth of job responsibilities, complexity and professional skills. The Employees salary structure is meant to ensure that:

• The Employer does not fall behind and fail to attract the right level of Employees
• The Employer does not overpay and create a major problem for the future with a salary structure that is in excess of the market demands
• The Employer does not fail to meet its goal of having a working environment that attracts, retains and develops committed Employees
• Each grade will have different components. The value and the components are dependent on the Grade of the employee. 
• If there is any change in the Grade of the employee the components will also change.

The entire details of the Salary components are mentioned in your Offer, Appointment, and other letters on salary revisions.

Gross Salary

The total of all components of the Monthly payout before any deduction is called the Gross Salary.  It will generally include:-

• Basic Pay / Basic Salary
• DA - Dearness Allowance
• House Rent Allowance - Normally it is 50% of the Basic Pay
• Night Shift Allowance
• Performance Incentives
• Leave Travel Allowance (If included in Gross Salary)
• Educational Allowance
• Food Allowance (If not given as Food Coupons)
• Other Allowances 

Deductions from Salary

Generally you will have the following as the deductions from Salary:-

1. Provident Fund (PF Employee's Contribution from Salary)

From the monthly Salary every employer is supposed to deduct 12% of the Basic Salary + DA.  This deducted PF is added along with the Employer's share of 12% and deposited into the PF Account of the employee.  

This is a compulsory savings.  The contributions are compulsory up to a limit of Rs.15000/- of the Basic + DA amount.  The Employees are allowed to contribute their share of 12% above Rs.15000/- limited.  Most of the Employers cover the entire Basic salary over and above the limit of Rs.15000/-. 

2. ESIC - (Employee's share of Contribution towards State Insurance cover)

From the monthly Salary every employer is supposed to deduct 1.75% of the Gross Salary.  This deducted ESIC is added along with the Employer's share of 4.75% and deposited into the ESIC account.  This is a statutory compliance for all thouse draw salary less than Rs.21,000/- per month as Gross.

In case, the Gross Salary is above Rs.21,000/- then there is no deduction of ESIC.  The Employer may at their own discretion provide the Mediclaim Insurance Coverage for their Employees.

3. PT - (Professional Tax - Payable to the Municipal Corporations)

Professional Tax is a tax paid to the Municipal Corporation / Local Body.  Every State Government in India has a different rates prevailing as per the notifications.  In some of the states PT is deducted monthly, in some of the states PT is deducted twice a year.

In Chennai - Professional Tax has to be paid for Earned Gross for the past Six months at a rate fixed by the Corporation of Chennai according to the Slabs fixed. 

4.  Income Tax  - (Deduction of Income Tax @ Source from Salary)

Income Tax is deducted from Salary Income based on the Declaration submitted by each individual employee.  The Employer will ask for the declaration of the Savings from every employee.  A projection is make of the Total Salary Income of the staff and the Income Tax for the year is arrived at based on the specified Tax slabs.  Consideration is given for the allowable and deductions as per the limits provided in the Income Tax Act.  Specified / Declared Savings are considered for computation of Income Tax.

Thus, the Income Tax on Salary computed for the year is divided by 12 months and monthly deduction is made from the Salary.  If the Deduction is not huge certain employers might start the Income Tax deductions from the month of January to and complete the entire deduction by March.

5. Other Deductions

Other deductions from salary generally might refer to:-

• Staff Advance / Loan
• Travel Advance 
• Canteen and Transport Facilities provided (If chargeable to employee)

Thus the Total Deductions is the sum of :-

1. Employee PF Contribution of 12% 
2. Employee ESIC Contribution
3. Professional Tax
4. Income Tax
5. Other Deductions

Net Salary - (Take Home Salary)Gross Salary less the deductions as stated above is the Net Salary or Take Home Salary.  

Always the Net Salary is what is paid in cash or deposited into the Bank Account.

ReimbursementsFor the purpose of Saving on Tax, certain components of Salary are generally reimbursed to the Staff.  They are generally paid based on the bills submitted / proof provided / or as per the norms of the employer.  This is paid separately and does not form part of the Net Salary.

All reimbursement of are subject to the Employment Contract / Letter of Appointment.  Some of them are like:-

• Petrol expenses of the employees - bills to be provided
• Driver Salary for the Employees car where the salary is paid by the employee to the driver
• Food Expenses subject to submission of the bills up to the limits provided
• Reimbursement of any other expenses on Telephone / Mobile / Books and Periodicals, etc. as per the grade
• Food Coupons issued 
• Reimbursement of Medical Expenses 

CTC Salary - COST TO COMPANY SALARY

It refers to the Cost of Employment of the employee for the Employer accounting and Budgetary purposes.  Every organisation will compute the total cost of Staff and this is based on the Salary Components of each of the employee and the contributions and additional benefits provided.

Thus CTC Salary is the Cost of Employment of the Employee which includes the following:-

• Gross Salary 
• PF Contributions of the Employer
  • 12% of the Employer's Share on Basic+DA
  • 1.65% of the Employer's share of administrative charges payable along with PF 
• ESIC Contributions of the Employer
  • 4.75% of the Gross Salary upto Rs.15,000/- limit
• Monthly component of Bonus payable at the End of the year
• Cost of Insurance Coverage provided to the employee
• Cost of Transport facility provided
• Cost of Canteen facility provided
• Cost of Food coupons provided
• Any other cost incurred in respective of the employee 

CTC salary might refer in most of the cases to the Annual Cost of Employment.  

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