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CTC vs Gross vs Net Salary: Differences & Easy Guide

CTC vs Gross vs Net Salary: Differences & Easy Guide

At times, employees find it challenging to understand the salary structure in India. After reviewing their salary slips, many wonder if they are receiving a lower in-hand salary than the one mentioned in the offer letter.

Many employees are unaware of the differences between CTC, gross salary, and net salary, as well as how various salary components and payroll deductions impact their take-home pay.

This blog will help individuals understand the differences between CTC, gross, and net salaries. It will also provide a step-by-step demonstration of how to calculate CTC and explain the salary breakdown you see on your payslip.

What is the Meaning of CTC?

CTC (Cost to Company) refers to the total annual expense an employer incurs for an employee. It is the total compensation package, which includes salary, allowances, bonuses, benefits, and employer contributions. Broadly, five salary components are considered while calculating CTC.

Components of CTC
  • Direct benefits: These include basic salary, bonuses, and allowances. Allowances can be of various types, such as House Rent Allowance (HRA), travel allowance, and conveyance allowance. Direct benefits also include coupons and other employee benefits.
  • Indirect benefits: These benefits encompass the non-cash components of an employee’s salary, including company-leased accommodations, transportation reimbursements, and health insurance. Benefits like medical insurance can also be considered part of indirect benefits.
  • Retirement benefits/Employer contribution: Employer contributions are statutory-mandated contributions that are not part of the take-home/in-hand salary. These include the Provident Fund (PF) and gratuity. Retirement benefits also consist of other statutory deductions, such as ESI and contributions under the National Pension Scheme (NPS).
  • Variable components: These components include incentives, commissions, profit-linked incentives, and stock options.
  • Fringe benefits: These include reimbursements for training, relocation allowances, retention benefits, and joining bonuses, among others.

Understanding your annual compensation package and its various components is crucial for accurate salary negotiation and effective financial planning.

What is Gross Salary? And how is It Different from CTC?

Gross salary refers to an employee’s earnings before deductions, including bonuses and allowances. The main difference between gross salary and CTC is that gross salary does not include employer contributions, like gratuity. However, CTC includes employer contributions, like gratuity and superannuation.

Gross salary only includes allowances, bonuses, and other forms of compensation, excluding overtime pay and other forms of compensation. On the other hand, CTC also covers the perquisites offered by employers. Here is the formula for calculating gross salary:

For reference, the average salary in India is estimated to increase by 9.5% in 2025. Please note that the average salary refers to the annual gross fixed salary. Additionally, your average or gross salary can vary depending on factors such as location, industry, experience, and sector.

Gross salary = Basic salary + HRA + Other allowances + Other earnings

Your salary slip will display these components, helping you understand your salary breakdown.

Explore the tabular illustration below better to understand the difference between gross Salary and CTC.

CTC (Cost to Company) vs Gross Salary

Parameter CTC (Cost to Company) Gross Salary
Definition CTC (Cost to Company) refers to the annual cost paid by an employer to an employee for their services. An employee earns it through bonuses and allowances, but without statutory deductions such as taxes and retirement benefits.
Components
  • Basic salary
  • Direct and Indirect Benefits
  • Statutory deductions
  • Basic salary
  • Variable components, like allowances
Used by Employer for estimating the total cost per employee. Employees and employers must calculate wages and deductions, including taxes.
Impact on in-hand salary No direct impact as it includes non-cash components. Direct impact, as it helps in calculating components such as allowances, bonuses, and other variable components, including dearness allowance.
Value Highest. Lower than CTC but higher than in-hand Salary.

What is Net Salary? (In-Hand Salary) and How is It Different from Gross Pay?

Net salary, also known as take-home income or in-hand salary, refers to the income that is transferred to an employee after accounting for all payroll deductions and non-monetary benefits. In contrast, gross wage includes bonuses, allowances, deductions, and other variable components. The formula for calculating net wage is:

Net salary = Gross salary – (EPF + Income Tax + Professional Tax + Gratuity)

Here is a table providing a concise overview of the differences between in-hand salary and gross salary.

Gross Salary vs Net Salary (Take-Home)

Parameter Gross Salary Net Salary (Take-home)
Definition Total earnings before any deductions. This is the total amount paid before any taxes and PF The final income is transferred to employees after all deductions
Components
  • Basic salary
  • Bonus Allowance
  • Commissions
  • Other variable components
  • Basic salary
Formula Gross = Basic pay + Allowances + Bonuses Net = Gross pay – (Taxes + PF + Other Deductions)

CTC vs Gross Salary vs Net Salary

After understanding the differences between CTC, gross, and net salary, let us now compare all three salary structures in a table.

Parameter CTC (Cost to Company) Gross Salary Net Salary (Take-home)
Definition The total cost a company spends on an employee annually, including direct and indirect benefits, employer contributions, statutory deductions, and other variable components Total earnings before any deductions, including bonus, allowance, and other variable components The final income is transferred to the employee after deductions, excluding non-cash benefits
Components
  • Direct benefits
  • Indirect benefits
  • Employer contributions
  • Statutory deductions
  • Incentives
  • Allowances
  • Basic salary
  • Allowances (HRA and conveyance)
  • Performance-linked bonuses
  • Other commissions
  • Basic Salary
  • Allowances
Calculation CTC = Gross salary + Direct and Indirect Benefits + Statutory Deductions + Employer contributions Gross salary = Basic salary + Variable Components + Statutory Deductions Net Salary = Gross – (EPF + TDS + Professional Tax + Other Deductions)
Value Higher than gross and net salary Lower than CTC but higher than net salary Lower than both CTC and gross salary

Real-World Example: Step-By-Step Calculation

Here is a step-by-step example of how to calculate gross and net salary from CTC, similar to what you might see on a salary calculator in India.

Let’s say you receive the following annual salary package:

Salary Component Amount (₹)
Basic Salary 4,00,000
House Rent Allowance (HRA) 1,50,000
Conveyance Allowance 50,000
Medical Allowance 42,000
Perquisites (meal coupons, etc.) 10,000
Employer PF Contribution 48,000
Employee PF Contribution 48,000
Total CTC 7,00,000

Step 1: Calculate Gross Salary

  • Gross Salary = CTC – (Employer PF + Perquisites)
  • Gross Salary = ₹7,00,000 – (₹48,000 + ₹10,000)
  • Gross Salary = ₹6,42,000

Step 2: Calculate Net Salary

Assume income tax is ₹8,000

  • Net Salary = Gross Salary – (Income Tax + Employee PF)
  • Net Salary = ₹6,42,000 – (₹8,000 + ₹48,000)
  • Net Salary = ₹5,86,000

How You Can Use this Approach

  • For HR/Payroll Team: Use these tables in employee onboarding kits, salary negotiation discussions, or HR portals to clarify salary structure.
  • For Employees: Refer to similar tables and examples when reviewing your offer letter or salary slip. Use online CTC calculator to cross-verify your take-home pay.

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Conclusion

Both employees and employers should know the difference between gross and net salary. Employees can negotiate the terms of their agreement more effectively if they understand the differences between these three salary structures and the impact of salary components on their taxable income from salary. Employers would be able to analyze the cost of their workforce and would make strategically sound decisions. Employees should remember that a higher CTC does not necessarily mean a higher take-home salary.

FAQs

Which is Bigger? Gross or Net Salary

The gross salary is larger than the net salary, as it includes components like allowances, bonuses, incentives, commissions, and statutory deductions. While net salary only consists of basic salary.

How do Bonuses Affect CTC?

Bonuses affect the CTC structure in any organization because they contribute to the total cost of hiring an employee. Bonus is one of the components of CTC and can be fixed or variable. This will be reflected in your salary breakup and annual compensation package.

Can the Net Ever Exceed Gross?

In almost every situation, the net salary cannot exceed the gross salary. This is because the gross salary includes variable components, deductions, and employee contributions, such as EPF, making it larger than the net salary.

What is the Difference Between CTC and In-Hand Salary?

CTC (Cost To Company) refers to the total cost of a package that a company pays for an employee’s services annually. In contrast, in-hand salary is the amount transferred to an employee after accounting for deductions and other fixed and variable components.

What Deductions Reduce Net Income the Most?

Some deductions affect net/take-home Salary –

Meet the author
Foram Nagodra
Content Writer

Foram has a talent for making complicated HR topics easy to grasp through her clear and well-researched content. Her curiosity and dedication to learning keep her updated with the latest trends in the HR world, allowing her to create content that is both practical and informative. She enjoys breaking down complex ideas into simple, relatable insights that help readers stay informed. Outside of work, Foram loves spending time with pets, exploring the world of gadgets, and staying curious about the ever-evolving world of technology.

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