Net Salary - Calculation and Difference From Gross Salary

Net Salary = Gross Salary - Professional Tax - Public Provident Fund - Income Tax

How to Calculate the Gross Salary?

Given below is the step-by-step procedure to calculate the Net Salary(Inhand Salary):

1. Initially, you must calculate the Gross Salary. Gross salary is neither your Cost to Company (CTC) or basic salary. Gross salary can be obtained by subtracting the Gratuity and the Employees' Provident Fund (EPF) from the CTC.

Gross Salary = CTC - EPF - Gratuity.

Calculation of Gratuity

The formula for the calculation of Gratuity is mentioned below:

Gratuity = (Basic salary x Dearness Allowance) x 15/26 x Number of years of service

The Gratuity that is subtracted on a yearly basis = 15/26 x Basic Salary (per month)

Next, you must calculate the taxable income. The taxable income can be generated by subtracting Tax Saving Instruments, Medical Insurance, Professional Tax, Leave Travel Allowance (LTA), House Rent Allowance (HRA), and Tax-Free Allowance from the Gross Salary.

Taxable Income = Gross Salary - EPF/PPF investment - Tax-Free Allowance - HRA - LTA - Medical Insurance - Tax Savings Instruments - Other Deductions

Calculation of HRA can be done by the minimum value from the below three scenarios:

1. The amount that the employer pays as the HRA.
2. The amount of rent that is actually paid minus 10% of the basic salary.
3. 40% of the basic salary in case the individual is staying in a non-metro city and 50% of the basic salary in case the individual is staying in a metro city.

Next, the income tax that must be paid for the financial year must be calculated. The income tax slab for resident Indians who are below the age of 60 years for FY 2023-2024 is:

Next, the net salary can be calculated. While calculating the net salary, the Professional Tax must also be deducted. The maximum Professional Tax that can be deducted in a year is Rs.2,500.

Therefore, approximately Rs.200 can be deducted on a monthly basis as a Professional Tax. The formula for the calculation of Net Salary is mentioned below:

Net Salary = Gross Salary - Income Tax - EPF - Professional Tax

Difference between Gross Salary and Net Salary?

Net salary is the amount of money an individual takes home after all deductions have been made, whereas, the gross salary can be defined as the figure that is obtained by totalling all benefits and allowances without deducting tax. Net salary is the gross salary minus deductions such as professional tax, pension, income tax, etc., while gross is inclusive of all benefits such as medical allowance, conveyance, house rent allowance, etc.

Best Ways to Increase the Net Salary

Given below are the best ways for individuals to increase their Net Salary:

1. Investment of up to Rs.1.5 lakh can be made towards Public Provident Fund (PPF), Employees' Provident Fund (EPF), home loan, LIC, National Savings Certificate (NSC), pension, and ELSS which provide tax benefits under Section 80C, 80CCC, and 80CCD of the Income Tax Act 1961. These benefits can be claimed at the time of filing Income Tax Returns.
2. By investing an amount of Rs.20,000 in Infrastructure bonds. However, these bonds come with a lock-in period which is between 5 years to 15 years but provides tax benefits under Section 80CCF of the Income Tax Act.
3. In case the employer provides food vouchers, an individual can opt for them.
4. By depositing money in a savings account. Apart from the interest that is earned, tax benefits of up to Rs.10,000 can be claimed.
5. In case an individual wants to buy a house, taking a house loan will provide tax benefits of up to Rs.3.5 lakh.
6. By investing in the Rajiv Gandhi Equity Savings Scheme (RGESS). However, under the scheme, a maximum of 50% of the money that has been invested can be exempt from tax and the individual should not have traded via a DEMAT account. The maximum salary of the individual must not exceed Rs.10 lakh as well.
7. Any medical insurance that has been bought by an individual for his/her parents or family up to a maximum of Rs.35,000 is exempt from tax.
8. Another way to increase the net salary is by taking advantage of the Leave Travel Allowance (LTA). In case you travel with your family on a holiday, tax benefits can be claimed by submitting the bills. This is a taxable allowance in case you do travel but do not claim it.
9. Certain companies provide a reimbursement of any telephone or mobile bills that have been incurred by you. In case this amount is not claimed, the expenses must be paid by you.