What is Gross Salary?

Introduction

Governments worldwide are responsible for managing and developing economies to ensure that citizens continue living comfortably. However, they need constant capital to fund development activities in their respective countries.

One of the best ways for governments to raise capital is by creating tax structures where citizens pay a certain percentage of their earnings to the government every year. In India, the Indian government, with the Finance Ministry, has created two tax regimes, the old and the new, for the citizens to choose and pay taxes.

However, the tax regimes include numerous factors that citizens must understand before paying taxes. One such important factor is gross salary. 
 

What Is Gross Salary?

The Indian Income Tax Act 1961 contains numerous tax deductions and exemptions for citizens to lower their taxable income. Gross salary is the total earnings of individuals before deducting any voluntary or mandatory deduction.

The gross salary includes the salary paid by an employer to a salaried individual or the total income from all sources for a self-employed person. If the salaried employee is earning from other sources over the income paid by the employer, the gross salary also includes such earnings before taxes or deductions.

Also called gross pay, it becomes net salary only after subtracting taxes and other deductions. 
 

Gross Salary Components

The next step in understanding gross salary meaning is its components. Since the gross salary is an individual's total earnings before subtracting any deductions, numerous components are included in the calculation of the gross pay.

Here are the components included in the gross salary: 

●    Basic Salary: The basic salary is the amount an employer pays an employee. The basic salary amount does not include benefits, incentives, bonuses or other perks. 

●    Employee Contribution to the Provident Fund (PF): The employers and the employees contribute 12% of the basic salary paid to the employer as a contribution to the Provident Fund. The amount contributed is also a component of the gross salary. 

●    House Rent Allowance (HRA): Employers pay employees a certain amount as a house rent allowance to cover their housing expenses, making it a vital component of gross pay. 

●    Perquisites: These are monetary or non-monetary benefits employers offer over the basic salary and other allowances. They pay the amount as compensation to the employees. 

●    Other Special Allowances: These are the allowances the employers pay over the basic benefits and allowances. Some special allowances include conveyance allowance, medical allowance, outstation allowance etc. 

●    Special Arrears: Specials arrears are the amount of money an employer pays to employees due to a specific salary hike. 

●    Professional Tax: Professional tax is a type of tax levied by the state governments on the gross salary of individuals. In India, the professional tax amount is Rs 2,500 per annum. 

●    Bonus: Employers pay employees a cash or non-cash performance-based incentive called bonuses. 
 

Components Excluded in Gross Salary

Certain components are not included in the gross salary, which you must know to fully comprehend the gross salary meaning.

Here is a list of components not part of the gross salary.

●    Reimbursement of medical expenses
●    Gratuity 
●    Travel Leave concession 
●    Free meals provided by the employers 
●    Leave encasement 
 

Gross Salary Calculation

Gross salary is one of the most important initial factors in the taxable income calculation. As it is the income before the taxpayer pays any deductions, it is calculated by adding a salaried employee’s or self-employed person’s total earnings from all income sources before making deductions.

Here is the mathematical formula to calculate the salary considered gross by the Indian government: 

Gross Salary: Basic Salary + House Rent Allowance + Other Allowances and Benefits 

For a better understanding of the calculation of salary considered gross, here is a detailed example: 

Geetika is a salaried employee of the organisation XYZ, with the salary structure as follows: 

The gross pay will be calculated for the above salary structure as follows: 

Gross Salary: Rs 25,000 + Rs 7,456 + Rs 1,800 + 1,560 = 35,816 

Difference Between Gross Salary and Basic Salary

While calculating or paying income tax in India, the net and gross salary are two important factors affecting the tax structure and process.

Here are the key differences between gross pay and net salary.

●    Definition: Basic salary is the amount of money an employee receives from an employer without adding any allowances or subtracting any deductions. On the other hand, gross salary is the amount of money an employee or individual earns through every source of income before taxes or deductions. 

●    Inclusions: Basic salary includes only the basic pay or wages of an employee, whereas gross salary includes all types of pay and benefits such as bonuses, overtime, commissions, and allowances.

●    Taxation: The Income Tax Department uses the basic salary to calculate an employee’s taxes and other deductions. In contrast, it uses the gross salary to calculate an employee's income tax and other statutory deductions.

●    Importance: The importance of basic salary for filing personal taxes is lesser than gross salary as the individual has to add all the benefits and allowances received while filing taxes. Furthermore, a majority of times, the amount of the basic salary is lower than the gross salary as it includes numerous paid benefits. 
 

Difference Between Gross And Net Salary

To understand the topic better, comparing gross salaries with other salaries, such as net salaries, is important. Gross and net salary are terms used to describe different aspects of an employee's salary or compensation package.

Here are the key differences between gross salary and net salary.

●    Definition: A gross salary is the total amount of money that an employee earns before paying taxes, or receiving any other deductions. A net salary is the amount of money an employee receives after paying all taxes and subtracting other earned deductions. 

●    Inclusions: Gross salary includes all types of pay and benefits such as bonuses, overtime, commissions, and allowances, whereas net salary only includes the amount of money an employee receives after making all the deductions. 

●    Calculation: Gross salary is calculated by adding up all of an employee's earnings, whereas net salary is calculated by subtracting all the deductions from the gross salary.

●    Importance: Gross salary determines an employee's total compensation package. In contrast, net salary determines an employee's actual take-home pay and for managing their personal finances.
 

Reporting Salary On Taxes

The Indian government, with the Finance Ministry, created the Income Tax Act 1961 to ensure that the Income-tax structure remains within the set guidelines and brings transparency to the citizens.

As per the Income Tax Act 1961, there are two types of taxes that the Indian government levies on Indian citizens. 

●    Direct Tax: Direct tax in India is levied directly on an individual or an entity's income or wealth. The Indian government directly collects the tax from the taxpayers, and the taxpayer cannot shift the burden of paying these taxes to other individuals or entities. 

●    Indirect Tax: Indirect tax in India refers to a tax levied by the Indian government on goods and services rather than on the income or wealth of individuals or entities. The government collects these taxes through intermediaries such as manufacturers, wholesalers, and retailers. It is ultimately passed on to the end consumers as a part of the final price of goods or services. 

Here are the income tax slabs in the old and the new regime.

The taxpayers can also use Sections 80C and 80D to lower their taxable income through tax-saving avenues available for investing. Here are some of the tax-saving instruments available under the sections.

●    Equity Linked Savings Scheme (ELSS) 
●    Employee Provident Fund (EPF) 
●    PPF Account Contribution 
●    Fixed Deposits 
●    National Savings Certificate
●    Children’s Tuition Fee 
 

Conclusion

It is always better to file taxes on time as they are critical for the country's development. However, numerous factors are included in the process of income tax and filing taxes, such as gross salary, so it is vital to understand their meaning. Gross salary provides a comprehensive view of an employee's total earnings before subtracting taxes and other deductions.