What is Net Salary?
Net salary or net income salary is also known as take-home salary where the employee is transferred the money in their bank accounts as a salary to be used for their daily consumption. This salary is calculated after deducting taxes on TDS, benefits, and extra allowances from their actual salary.
How to calculate Net Salary?
Net salary is the amount after deduction of the following items:
- Taxable income
- Employee’s contribution to provident fund, gratuity, and medical insurance
Net salary = Taxable income – allowances – employee’s contribution
How to calculate the taxable income of an employee?
Taxable income is the amount after deduction of the following items:
- HRA or Rent paid by the employer
- Pension paid by the employer is exempted from tax
- Provident fund, gratuity, and medical insurance paid by an employer
- Contribution of an employer towards employee’s PF and ESI
Taxable income = [Total salary – (HRA or Rent paid by employer or Pension paid by the employer is exempted from tax or Provident fund, gratuity and medical insurance paid by employer or Contribution of an employer towards employee’s PF and ESI or Income tax on leave encashment) – Income tax on income from other sources]
Gross salary vs Net salary
The terms gross salary and net salary are often used interchangeably, but there is a difference between the two. A gross salary refers to an employee’s salary before any deductions have been made from their wages for taxes or other purposes. Net salary, meanwhile, is the actual amount a person receives after their income has been taxed by the government.
The term gross salary can be used to refer to either a person’s annual income before it is taxed or the annual salary of an employee. When used in this way, net salary does not have a specific meaning and may instead refer to an amount that has been reduced from a person’s gross salary as a result of taxation. In fact, the term gross salary is often used to refer specifically to an annual salary.
Why do you need to know your net salary?
Your net salary is extremely important as it determines how much money you have each month for your living expenses, and how much money goes to other things like credit card payments or savings. For example, if your total salary is Rs. 5000 but only Rs. 2500 is your net salary, you’re going to have a hard time paying off your credit card bill. It’s also important when calculating retirement contributions and other benefits.
What are the components of your net salary?
In addition to being paid a regular wage or salary for working, an employee in most countries receives additional benefits from the employer –
- Sick leave pay
- Maternity or paternity leave pay
- Vacation pay
- Medical insurance benefits
- Miscellaneous allowances (such as travel allowance, uniform allowance, etc.)
- Retirement pension contributions made by the employee on behalf of the employer
- Periodic bonuses or incentive payments (such as performance-related bonus, attendance bonus, etc.)
- Overtime pay
- Lump-sum payments (such as for annual/special/vacation leave encashment)
- Commission or sales allowance
- Annual wage adjustments for inflation or deflation (in some countries)
- Other items (such as company car, housing allowance, etc.)
So basically the net salary is your regular wage minus all of this extra stuff. The bonus and lump sum payments are typically taxed at a higher rate – so if you get one of these remember to budget in advance for it!