Understand the meaning of basic salary, gross salary and net 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.
In the attached screenshot, basic salary is Rs 15,000.
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 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.
Allowance granted to an employee to meet his expenditure for the purpose of commuting between his place of residence and office/place of duty.
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.
Allowance which is paid when an employees’ working pattern varies from week to week on a rota basis.
Performance incentive is a monetary gift provided to an employee based on performance.
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 also referred as ‘Take home salary’ is the amount which is left after deductions like PF, EPS, Advance etc.
Net salary = Gross salary – Deductions
In the above screenshot, the difference of gross salary and deductions is Rs 23245 which is net pay.