Diving the salary structure pool is not easy, especially for an employee who is unaware of salary and tax updates. The payroll process can be challenging as various components are to be calculated while calculating. Even if someone successfully perceives it, the most confusing thing is to figure out the difference between the gross pay vs. net pay in an employee’s salary. Though they might seem the same, in an actual context, they differ a lot. And the main difference and other calculations are entailed moving ahead.
Gross and net income are most important for calculating individual salary, and there’s a lot of difference between these two. Both represent salary components that one earns, but the contrast comes when tax and other deductions are included.
The Gross pay forms the central part of the CTC structure. It comprises the addition of the basic salary and the allowances one receives as per the government and organization norms.
Net pay is also an essential part of the salary structure, regarded as the employee’s take-home salary. The salary remains after the statutory and TDS deduction made from the Gross income. Statutory deductions include the EPF, Professional Tax, and ESIC contributions made according to the statutory rules and regulations.
Gross pay is usually the total earnings shared with the candidates the organization wants to attract. It is the income that the employee receives before the taxes are subtracted.
While the net income is what an employee finally receives in hands as negotiated at the recruitment time (subjected to post increments) after the total deduction is performed.
Considering a payslip, Gross income is always mentioned above, and Net income is finalized at the bottom, giving you the exact difference between them. It is always lower than the gross pay, and that is how you can differentiate these.
Employees may wonder as the net salary is always lower than the gross salary. It is then essential to take them out of the well to avoid disputes.
As an HR, it is always hard to calculate the salary for every employee. Also, if you are offering the salary without deducting any taxes, then you may be paying them under the table, which is an offense to the rules.
The gross pay is a summation of the basic salary that one receives, allowances to cover up the recurring costs, reimbursements, and the annual bonus amount on the basis of their job criteria.
Gross salary = Basic salary + Allowances (DA + HRA + LTA + others) + Bonus + Reimbursements
This calculation changes as per the employees’ job description, such as hourly and salary employees. Both hourly and salary employees could be full-time, part-time, and job-sharing basis.
If you have employees working hourly, then they are to be paid according to the hourly pro-rata. The payment to these employees can be weekly or bi-weekly as per the company.
Gross salary of Hourly employees = Hourly rate of employee * Hours worked
For example, an employee’s hourly rate is 80 ₹, and the hours worked by them is 8 hours a day. The daily wage received by the particular employee is 80*8, which is equal to 640 ₹ per day.
Salary employees’ gross pay is calculated based on the annual and not hourly. Therefore, it can be weekly, bi-weekly, or monthly.
Gross salary of salary employee = Annual Salary / Number of pay periods
Suppose the annual salary of the employee 3,60,000 ₹ and the organizational pay period is 12 months. The employee’s gross income will be 3,60,000/12, which is 30,000 ₹ per month.
Firstly for the estimation of net pay, the knowledge of gross pay is essential. The calculation of net income comprises the respective tax responsibility of an employee. These tax liabilities may change annually and are critical to be noted down. The formula to calculate the net income is as included below.
Net Salary = Gross Salary – Statutory deductions (EPF, ESIC, Gratuity) – Income Tax (TDS, PT)
For instance, have a look at the following table. It gives a clear understanding of payroll calculations for the gross and net payments.
|EARNINGS (per month)||STATUTORY DEDUCTIONS (per month)||STATUTORY ADDITION(per month)|
|Basic||18,000||Employee Provident Fund (Employee)||2520||EPF (Employer)||2520|
|ESIC (Employee)||157.5||ESIC (Employer)||682.5|
|Tax Deducted at Source||1700||Statutory Bonus||1749|
|Gross Salary = 34,000 per month|
|Net income = 29,422.5 per month|
According to the formulas
Gross income = 18,000 + 12,500 + 2500 + 500 = 34,000 Rupees / month
Cost to company = 34,000 + 6465.5 = 40,465.5 Rupees / month
Net income = 34,000 – 4,577.5 = 29,422.5 Rupees / month
Though salary calculation is essential, the storage of that salary also needs to be done. A company must record up to at least 3 years of compensation and the details of its components of all their employees for accounting purposes. It is essential for regulatory audit objectives.
Payslips are the detailed receipts the employer is mandated to offer the employees every time the payroll is transferred. These are also called Paystubs, Paychecks, etc., and include details of only one single employee. As discussed above, both gross and net salary are printed on a payslip to verify the difference.
It lists down every component of the salary like tax reduction, allowance additions, basic earnings, year-to-date total, etc. such payslips now come in digital and physical forms, whichever the company and business prefer.
Unlike payslips, the payroll register offers the information of all the employees’ salaries. It also includes the same elements as provided in the payslip. The difference is it is not provided to the employee and is useful for company purposes.
The payroll register is the most essential for the audit check. This type of log can be manually or digitally made. Companies’ automated software nowadays includes the accounting and payroll JV option to record the salaries.
If you are able to identify the components required to complete the payroll cycle, it will be more helpful for you to understand the various salary calculations. HR personnel and the employees must also be aware of their earning and deduction elements to be assured about the payment received. This understanding must be from the fundamental difference between Gross pay vs Net pay. It will eventually help to understand the whole salary process.