Understanding the difference between gross pay vs net pay is not easy, especially for an employee who is unaware of different kinds of salary and tax policies. The payroll process can be challenging as various components are to be calculated while processing. The most confusing thing is figuring out the difference between basic, gross, and net pay in an employee’s salary. Though they might seem the same but, they differ a lot. Hence the main difference and other calculations are mentioned below.
The Gross pay forms the main part of the CTC structure. It includes the additional components to the basic salary and the allowances one receives as per the government and organization norms. But it doesn’t include the tax & other deductions.
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.
Salaried 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 is 3,60,000 ₹ and the organization’s pay period is 12 months. The employee’s gross income will be 3,60,000/12, which is 30,000 ₹ per month.
Basic pay, as the name just is very basic. It’s a basic amount that an employee receives without the addition of any benefits or tax deductions. Basic pay is the main component of an employee’s overall salary because all benefits and taxes are calculated on the basis of basic pay.
Basic pay is an amount without any benefits or tax deductions, On the other hand, Gross pay is an amount that includes basic pay as well as the benefits but it doesn’t include any deductions. The only difference between basic & gross pay is the benefit components that are included in the gross salary but not in the basic salary.
Net pay is also an essential part of the salary structure, also known as the employee’s take-home salary. This is amount that’s remains after the statutory and TDS deduction are made from the Gross income. Statutory deductions include the EPF, Professional Tax, and ESIC contributions made according to the statutory rules and regulations.
For the calculation 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 important to be noted down. The formula to calculate the net income is as 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
Gross pay is usually the total earnings shared by the organization with the employees. It is the income that the employee receives before the taxes are deducted. While the net income is what an employee finally receives in hands as negotiated at the recruitment time (subjected to post increments) after the tax deduction is done. Considering a payslip, Gross income is always mentioned above, and Net income is finalized at the bottom, giving you the exact difference between them. Net income is always lower than gross pay, and that is how you can differentiate these.
Basic, gross & Net pay, all three are connected to each other and its important to understand them if you want know the various salary calculations. And we hope that we have cleared your doubts through this article. If you want to learn more about payroll then you can read our Guide on Payroll.