Gross income denotes the total earnings without any deductions or tax adjustments. For salaried individuals, gross income is also known as Cost To Company (CTC). However, the take-home pay or in-hand salary would be different after tax and other deductions.
For instance, Raj’s total income is Rs. 4,00,000, and he has paid Rs. 80,000 as Life Insurance premium. His total gross income will be Rs. 4,00,000, while his net income will be Rs. 3,20,000.
Here are all the details about gross income and how to calculate it. Read on!
Your gross salary would be a total of all taxable receipts for the previous year. This will also consist of profits or losses that you carry forward from the previous year and any income after including other provisions.
However, your gross salary will not consist of deductions under Section 80C and Section 80U.
To understand what gross salary is, let’s see the following example:
Mr Gopal works as a Marketing manager with Company ABC. These are the components in his income:
Basic Salary = Rs.50,000
House Rent Allowance = Rs.15,000
Leave and Travel Allowance = Rs.5,000
Special Allowance = Rs.2,000
To calculate Mr Gopal’s salary, we will have to add all these components. Hence, In this case, the gross salary of Mr Gopal would be:
Rs.(50,000 + 15,000+ 5,000 + 2,000) = Rs.72,000.
If you are a salaried individual, your annual salary is your gross income, along with other sources of income like investments. However, if you run a business, the gross income is the revenue which your business earns from offering goods and services – the cost of the goods you sold (not including applicable taxes). Let’s take an example to have a clear understanding.
Your business has received total revenue of Rs. 10 lakh. Here are the costs that your business has incurred:
So, the cost of selling goods is Rs (3+3+1.5) lakh or Rs. 7.5 lakh.
Therefore, gross income would stand at Rs. 2.5 lakh (Rs. 10- 7.5 lakh)
Here are some of the primary components of gross salary:
It is the portion of the employee’s cost-to-company that is paid to them by the employer. It does not include any allowances or prerequisites that the employee receives. Basic salary is not subjected to any deductions nor qualifies for exemptions. It is a part of an employee’s gross income and is lower than the take-home salary.
Arrear is an amount paid to an employee as a result of increment or hike in salary. These are mostly overdue payments that an employee is bound to receive at the end of a specific period.
Prerequisites are benefits that employees receive in addition to basic salary and other allowances. This depends on the stature that you have in an organisation. These benefits can either be monetary or non-monetary and can either be taxable or non-taxable.
This allowance is generally granted by the employer to provide for the employee’s cost of accommodation. It helps in covering the cost of living of the employee and offers tax benefits.
Some of the other important components of gross salary are Medical Allowance, Conveyance Allowance, Leave Travel Allowance (LTA), Salary Arrears, Performance Based Incentive and Utility Bills.
Here is a list of things that do not form a part of the gross salary that an employee receives from the employer:
The differences between Basic and Gross salary have been explained below:
|Parameter||Basic salary||Gross salary|
|Definition||It is the basic salary agreed upon between a company and its employee.||It is the compiled compensation amount that includes arrears, bonuses and overtime.|
|What doesn’t it include?||Bonus, overtime or any extra compensation.||Tax deductions.|
For example, an employee’s gross salary can be Rs.50,000 and basic salary can be Rs.25,000. This means that the person’s fixed income is Rs.25,000 and the remaining compensation comprises allowances such as dearness allowance, house rent allowance and conveyance allowance.
The differences between salary and net salary have been discussed below:
|Parameters||Net salary||Gross salary|
|Meaning||Net income is obtained after removing all your liabilities from the gross income.||Gross salary is the overall amount that you earn before removing any liabilities.|
|What does it include?||It reflects the take home or in-hand salary.||Medical allowance, house rent allowance, conveyance allowance, etc.|
|Calculation method||Calculated by subtracting deductions like income tax, professional tax, etc.||Calculated before deduction of tax.|
Now that you have a clear idea about gross income, you can easily calculate your income tax and file income tax returns. It will also be essential for chalking out your monthly budget. However, you should note that your gross income is not the same as taxable income.
Ans: CTC or cost to the company is a sum finalised by a company when an employee is recruited. It includes the basic salary, provident fund, gratuity, medical insurance and various allowances. Basically, it is an employee’s overall salary package. It denotes the cumulative expenses by an employer during a year.
Ans: The different components of income are specified under Form 16 in Sections 17(3), 17(2) and 17(1). Companies issue the form on or before May 31 of the upcoming year. Form-16 is a crucial document that helps to prepare the ITR.
Section 17(1) comprises basic salary and different allowances. Section 17(2) mentions the perquisites of the employees, while Section 17(3) includes commissions, bonuses, etc.
Ans: Yes, salary arrears are taxable for the employees. However, employees may file for a relief u/s 89 of the Income Tax Act, 1961 to reduce the tax burden in a financial year. A taxpayer needs to submit Form 10E to avail of the relief.
Ans: An organisation offers specific benefits to its employees (based on their positions), known as allowances. These expenditures are an addition to an employee’s basic salary. The Income Tax Department categorises allowances into partially exempt, exempt and taxable.
Ans: Tax is charged on leave encashment if an employee receives it at the time of service. A tax exemption is applicable for government employees who receive it during retirement. For non-government employees, the tax liability depends on the limits specified in the IT Act.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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