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.

Income tax slab for Financial Year 2017 – 18

The below given income tax slab is applicable for financial year 2017 – 18 and assessment year 2018 – 19.

Income tax slab for financial year 2017 -18 & assessment year 2018 – 19

(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.

Education Cess : 3% 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.

How is income tax calculated?

Income Tax:

Income tax is amount of tax levied upon income of an individual earned during a financial year.

Taxable Income:

Taxable income computation is first step in calculation of income tax.  Income tax is calculated on annual taxable income and deduct every month from income of an individual on average basis. Total Income is sum of YTD and prorated income.

Income tax computation:

Tax is applicable on the basis of income tax slab which categorizes income and rate of tax levied on each category.

For example Dinesh was born on 26 July 1985. He is working in XYZ Ltd. His taxable income for the financial year 2015 – 2016 is 22,68,000. Tax rate applicable for his income would be like this:

Income tax

Now, based on the above categorization, computation of tax for Dinesh’s income can be done as follows:

Because on the income below 250000, tax amount is nil, so Dinesh won’t have to pay any tax on the this amount i.e. 250000.

On income in excess of 250000 (but less than 500000), he will have to pay a tax of 10% plus 3% of tax amount as education cess:

Income tax

Now on income in excess of 500000 (but less than 1000000) he will have to pay 20% tax plus 3% of tax amount as education cess:

Income tax

Dinesh’s income is more than 10,00,000. So he will have to pay 30% tax and 3% of tax amount as education cess on the income in excess of 1000000.

Income tax

Total tax payable for Dinesh would be:

25750 +  103000 + 1279412 = 520562

Note: Surcharge is not applicable on Dinesh’s income as his total taxable income is less than 10000000. Also Dinesh is not eligible for rebate u/s 87A as his total taxable income is more than 500000.

Income tax slab for FY 2015 – 16

The below given income tax slab is applicable for financial year 2015 – 16 and assessment year 2016 – 17.

Income tax slab for Financial year 2015 -16 & Assessment year 2016 – 17

(Amounts are in Indian rupees)

For Men and Women:

Rate Men Women
Exemption limit Up to 2,50,000 Up to 2,50,000
10% 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 super senior citizens (Age above 80):

Rate Senior citizens Super senior citizens (Aged 80 and above)
Exemption limit Up to 3,00,000 Up to 5,00,000
10% 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: 12% of the tax amount, where taxable income is more than INR 1 crore.

Education Cess : 3% of tax amount and Surcharge.

Rebate: As per section 87A of Income tax act 1961, rebate of INR 2,000 will be given to those individual tax payers whose total taxable income doesn’t exceed INR 5,00,000.