What is basic salary, gross salary and net salary?

Understand the meaning of basic salary, gross salary and net salary:

Basic Salary:

Basic salary is the amount paid to an employee before any extras are added or taken off. Added extras include HRA, DA, Transport Allowance etc. whereas deductions include Provident Fund, Employee State Insurance etc.

Basic salary

In the attached screenshot, basic salary is Rs 15,000.

Gross Salary:

Gross salary (also called gross pay) refers to pay components which an employee receives in return of his/ her service. These pay components are categorized as recurring and non – recurring pay components. In other words, whatever an employee receives from employer as part of salary constitutes gross salary.

Gross salary = Basic salary + Recurring pay components + Non – recurring pay components

Recurring pay components:

These are master salary components which remain fixed irrespective of performance. Recurring pay components are supposed to occur constantly over a period of time.

Example: Basic salary, House Rent Allowance (HRA), Dearness Allowance (DA) etc.

Non recurring pay components:

Unlike recurring pay components, non recurring pay heads keep changing on monthly basis and are based on performance. An employee may or may not get paid these pay heads constantly throughout the period.

Example: Performance incentive, Bonus, Commission etc.

Components of gross salary:

Basic Salary:

Basic salary is the amount paid to an employee before any extras are added or taken off.

Dearness Allowance (DA):

The Dearness Allowance is a cost of living adjustment allowance paid to government employees, public sector employees and pensioners in India, Bangladesh and Pakistan.

House Rent Allowance (HRA):

House rent allowance (HRA) is a pay component, employees receive from their employer to pay house related expenditure.

Transport Allowance:

Allowance granted to an employee to meet his expenditure for the purpose of commuting between his place of residence and office/place of duty.

Conveyance Allowance:

Allowance granted to meet the expenditure on conveyance in performance of office duty

Medical Reimbursement Allowance:

Fixed component which is received as part of monthly salary. No bills are required to be submitted for taking this allowance.

Leave travel allowance (LTA):

Allowance which is provided to employee to cover travel expenses for vacations.

City Compensatory Allowance:

Allowance which is paid to employees as a compensation for the high cost of living in metropolises and large cities where the standard of living is higher than the national average.

Shift Allowance:

Allowance which is paid when an employees’ working pattern varies from week to week on a rota basis.

Performance Incentives:

Performance incentive is a monetary gift provided to an employee based on performance.

Gross salary

In the above screenshot, the total of all the pay components (Basic salary, HRA, Conveyance allowance, Medical allowance and VIC) is Rs 25,945 which is gross salary.

Net Salary:

Net salary also referred as ‘Take home salary’ is the amount which is left after deductions like PF, EPS, Advance etc.

Net salary = Gross salary – Deductions

Net salary

In the above screenshot, the difference of gross salary and deductions is Rs 23245 which is net pay.

Income tax slab for Financial Year 2018 – 19

The below given income tax slab is applicable for financial year 2018 – 19 and assessment year 2019 – 20.

Income tax slab for financial year 2018 -19 & assessment year 2019 – 20

(Amounts are in Indian rupees)

For Men and Women:

Rate Men Women
Exemption limit Up to 2,50,000 Up to 2,50,000
5% of taxable income Income between 2,50,001 to 5,00,000 Income between 2,50,001 to 5,00,000
20% of taxable income Income between 5,00,001 to 10,00,000 Income between 5,00,001 to 10,00,000
30% of taxable income Income more than 10,00,000 Income more than 10,00,000

 

For Senior citizens (Age between 60 and 80) and very senior citizens (Age above 80):

Rate Senior citizens Very senior citizens (Aged 80 and above)
Exemption limit Up to 3,00,000 Up to 5,00,000
5% of taxable income Income between 3,00,001 to 5,00,000 Nil up to 5,00,000
20% of taxable income Income between 5,00,001 to 10,00,000 Income between 5,00,001 to 10,00,000
30% of taxable income Income more than 10,00,000 Income more than 10,00,000

Surcharge: 10% of tax amount, where taxable income is between 50,00,000 to 1 crore.

15% of the tax amount, where taxable income is more than 1 crore.

Health and Education Cess : 4% of tax amount along with surcharge.

Rebate: As per section 87A of Income tax act 1961, rebate of INR 2,500 will be given to those individual tax payers whose total taxable income doesn’t exceed INR 3,50,000.

Gross Profit – Meaning and Formula

Gross profit also known as gross income is the excess of net sales over cost of goods sold. Put it simple, gross income is the difference between net revenue (net sale) and cost of goods sold. Gross income accounts for operating expenses, interests and taxes.

Formula for the calculation of gross profit:

Gross income = Net sales – Cost of goods sold

Net revenue or sales is calculated by subtracting the amount of sales returns, allowances and discount from gross sales.

Net revenue = Gross sales – (Sales returns + Allowances + Discounts)

Cost of goods sold (COGS) refers to direct costs incurred in manufacturing products or providing services and is calculated as

COGS = Opening stock + Purchases – Closing stock

Example:

From the figures given in income statement of XYZ ltd, gross income can calculated as:

Gross Profit

Gross sales = 100,000

Cost of goods sold = 25,000

Gross income = 1,00,000 – 25,000 = 75,000.

Gross income figure is used in calculation of one of the important profitability ratios known as gross profit margin.

Net profit – Meaning & Formula

Net profit is the excess of a company’s net revenue (net sales) over its total expenses. For this purpose, total expenses include both direct and indirect expenses as well as interest and taxes.

If a company is liable to pay dividend to preference shareholders then the amount of dividend is also subtracted to get this figure. Here, it should be noted that the dividend paid to equity shareholders is not deducted from net sales.

Net profit is the also known as Profit after tax (PAT).

Formula for the calculation of net profit:

Net sales – COGS* – Operating expenses – Interest and taxes – Dividend to preference shareholders (If any)

Or

Gross profit – Operating expenses – Interest and taxes – Dividend to preference shareholders (If any)

Or

Operating profit – Interest and Taxes – Dividend to preference shareholders (If any)

*Cost of goods sold (COGS) = Opening stock + Purchases – Closing stock

Example:

From the figures provided in income statement of XYZ ltd, PAT can be calculated as:

net profit

 

Net profit = Gross profit – Operating expenses – Interest and taxes

= 75,000 – 22,000 – 12,000* = 41,000

Or

Operating profit – (Interest and Taxes)

= 53,000 – 12,000* = 41,000

 

 

 

* The given figure is the sum total of Interest and Taxes.

Net profit margin – Meaning & Formula

Net profit margin is calculated by dividing the amount of net profit by net sale. This is one of the important profitability ratios used to gauge the overall profitability of a firm. This ratio is often used to measure the efficiency of a management to derive profit out of its sale.

Net profit is the amount which is left after deducting all direct and indirect expenses from the amount of total sales.

Net profit = Operating profit – Interest and taxes

In case a company pays dividend to its shareholders then dividend paid to preference shareholders (not to equity shareholders) is also deducted to get the net profit.

Formula for the calculation of net profit margin:

Net profit ratio = Net profit/ Net revenue

The higher degree of this ratio shows that management is effectively generating profit while incurring lower costs.