Take home salary calculator, salary breakup and everything you need to know about salaries!

The excitement associated with your first job is inexplicable. Undoubtedly, one of the most exciting things of starting a new job is getting that first pay cheque at the end of the month. However, that excitement comes with some confusion owing to the jargon that you come across for the first time with regards to your salary. “The salary mentioned by company was X rupees, but the amount I received is less than that amount. Where’s the rest?” This is the most common question that one gets on receiving the pay slip. It is usually less than the expectation of a fresher employee.  We know the amount of confusion all of this can create.

There are various terms associated with salary that are perhaps difficult to understand for a fresher. Terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, and insurance often create confusion. One is usually in a state of confusion when one has to calculate take home salary. Hence, we have attempted to delineate all the terms associated with salary in order to make it simpler for you to grasp the concepts and familiarize yourself with them.

  1. Understanding CTC– The phrase “Cost to Company” or CTC as it is generally referred to, is the total amount that a company spends on an employee. However, CTC doesn’t mean the amount that you receive in your pay slip. There are many components in your CTC that you won’t receive. In interviews, companies generally advertise the CTC and not the take home salary. Your CTC is inclusive of your basic pay, direct benefits, indirect benefits, your contribution to savings and tax deductions.
  1. Basic Salary – Basic salary is the core of salary and is a fixed part of one’s compensation package. In simpler words, it is the amount paid to an employee and many components are added or deducted on this amount. A basic salary depends on the employee’s designation and also the industry in which the employee works. Your basic salary will be minus your allowances, reimbursements, insurance and provident fund.
  1. Gross salary– Gross salary on the other hand is the salary inclusive of your basic salary and allowances.

         Gross Salary = Basic Salary+ Allowances

  1. Allowance– Allowance is the amount received by an individual for meeting service requirements. Allowances are given in addition to the basic salary. Allowances depend on companies and various types of allowances are given like HRA(House Rent Allowance), Leave Travel Allowance(LTA), Children’s Education Allowance, Lunch Allowance, Phone Allowance, Travel Allowance among others.
  1. Reimbursements– Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills etc. The money is not received in the salary, but on submission of the bills reimbursement will be given. Generally, there is an upper limit for every category of reimbursement.
  1. Provident Fund or PF– Provident fund is an investment both by the employer and the employee each month, the lump sum amount of which is provided to the employee on retirement. Provident fund contribution is 12 percent of the basic salary and is directly deposited in the employee’s PF account. So, twelve percent of the basic salary gets contributed from the employee and another twelve percent by the employer. Contribution for provident fund is mandatory for Indian companies.

Note: Don’t confuse EPF(Employee Provident Fund) with PPF(Public Provident Fund). PPF is a voluntary contribution by the employee and is completely controlled by the employee. Your employer has nothing to do with your PPF account. People open a PPF account for two main reasons, one is for tax saving purposes and second for long term investment. This is because PPF provides 8.5% per annum and more importantly both contribution and maturity amount is tax free. Apart from the basic fact that PPF is your personal provident fund account and only you can contribute there, EPF contribution is made by you and your employer.

  1. Tax– The tax levied on one’s personal income is called Income Tax. If your annual income exceeds the maximum amount which is not chargeable, you have to pay a tax at the rate prescribed under the finance act. Usually, an employee gets his or her salary after the tax is deducted by the employer. This process is called as Tax Deduction at Source (TDS). The company has to issue a Form 16 which contains the details about the salary earned by that employee and the amount of tax deducted.  The tax deducted is paid to the government by the company. Professional Tax is the tax charged by the state government in order to let an individual practise a certain profession. The maximum amount payable per year is INR 2,500. It depends on one’s monthly salary and also on the state in which one works. As an example, the table below to get an idea of the professional tax charged by the Maharashtra government.
Monthly Salary Amount payable in Maharashtra
< INR 7500 Nil
INR 7501 – INR 10000 INR 175 per month
>INR 10000 INR 200 for all months except February

INR 300 for February

In order to get a better idea of the professional tax charged in other states, click here.

Form 16 – It is the proof of employee’s income and tax paid to the government. It is issued under section 203 of Income Tax Act for Tax. The tax payer has to use the Form 16 to file the Income Tax returns every financial year. Apart from income tax a professional tax is also paid to the state government of the state where one practices a profession.

  1. Life Insurance and Health Insurance – Many companies provide a health insurance to their employees and their dependents and also a life insurance, the premium for which is borne by the employee and is included in the CTC.
  1. Gratuity –Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job. Dearness Allowance or DA is a living allowance paid to employees and is calculated as a percentage of one’s basic salary. The percentage value depends on the company and this is not mandatory for every company.

Gratuity Calculation= [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26 where D.A – Dearness Allowance which is different for each company.

  1. Financial year(FY)– In order to understand tax better, let us understand what a financial year and assessment year means. A financial year is a year as reckoned for taxing and accounting purposes. It commences from April 1 of a year and ends on March 31 of the following year. In case of filing IT returns, financial year is the previous year. It is the year in which one has earned the income. Hence, if you are filing a return this year, that is 2016, the financial year will be 2015-16.
  1. Assessment Year(AY)– Assessment year on the other hand is the year in which you file your returns. It is the year in which the income that you have earned in the financial year will be evaluated. For example, if you have earned your income between 1 April 2015 and 31 March 2016, then 2016-2017 will be the Assessment Year. Hence, it is the year in which your tax liability will be calculated on the previous year’s income.

As an example, take a look at the tabular data below for better understanding:

Income year Financial Year Assessment Year
2012-2013 2012-2013 2013-2014
2013-2014 2013-2014 2014-2015
2015-2016 2015-2016 2016-2017

The amount of tax paid by an individual is dependent on the income range. Let us look at the tax slabs for financial year 2015-2016 to gain better comprehension of the tax structure. 

Tax Slab for individuals for the year 2015-2016(Male or Female)

                      TAX RATE         INCOME RANGE
Nil Upto 2.5 lakhs
10 % 2.5-5 lakhs
20 % 5-10 lakhs
30 % Above 10 lakhs

Note: If your salary (CTC) is say 9 Lakhs, it doesn’t mean your tax is 20% of 9 Lakhs. This is a wrong way to calculate. Read below how to calculate your take home salary and the income tax that you pay.

How do you calculate your take home salary? – The most important question everybody has! You can calculate your take home salary provided you have a few numbers beforehand. We have provided some easy steps to help you calculate your take home salary. This can help you plan your savings ahead of time and also help you maximize your returns.

  1. Determine Gross Salary:  The first step is to find out the gross Salary which is obtained by subtracting the employer’s contribution to one’s Provident Fund or EPF and gratuity from CTC.

Gross Salary = CTC – (EPF + Gratuity)

  1. Determine Taxable Income: In order to determine the part of your income that is taxable, subtract allowances, professional tax, medical bills, medical insurance, tax saving investments and other deductions from your gross salary.

Taxable Income = Gross Salary – (Allowances + Medical bills + Medical Insurance + Tax Saving Investments + Other Deductions)

  1. Determine Income Tax: You can easily calculate Income Tax by referring to the Income tax slab and rates provided above.
  1. Calculate your Take Home Salary: In order to calculate your Take Home Salary, you simply need to subtract the Income Tax, Provident Fund (PF) and Professional Tax from the Gross Salary.

Take Home Salary = Gross Salary – (Income Tax + Employee’s PF Contribution(PF) +Professional Tax) = CTC – (EPF + Gratuity) – (Income Tax + Employee’s PF Contribution(PF) +Professional Tax)

Let us understand this better with a help of an example. Let’s assume that your annual CTC is Rs. 8,00,000 for the financial year 2015-16. Your annual conveyance is given as INR 19,200, Basic salary as INR 6,00,000 and HRA as INR 3,00,000. The salary break up will look something like the tables below:

COMPONENT MONTHLY (in INR) YEARLY (in INR)
TAKE HOME 51,584.95 619,019.38
INCOME TAX 476.72 5720.62
PROFESSIONAL TAX 200.00 2,400.00
GRATUITY 2,405.00 28,860.00
EPF/PF – contributed by employee (12 % of basic salary which is 600000 ) 6,000.00 72,000.00
EPF/PF – contributed by employer 6,000.00 72,000.00
TAX SAVINGS MONTHLY YEARLY
CURRENT 5,046.49 60,557.82
POTENTIAL 5,523.20 66,278.44
COMPARISON MONTHLY YEARLY
TAKE HOME 51,584.95 619,019.38
GROSS 58,261.67 699,140.00
CTC 66,666.67 800,000.00

Explanation for how the above calculations are made:

Gross Salary: Gross Salary (699,140.00) = CTC (8,00,000.00) – EPF (72,000.00) – Gratuity (28,860.00)

Gratuity = Basic Pay+ D.A x 15 days x No. of years of service(5)  / 26

Basic Pay – 6,00,000 (Please note that the values used are only for indication. Basic salary may include various components which will differ from company to company)

D.A – 2004 (It is an assumed value. DA again differs from company to company)

No. of years – 5 (The minimum number of years for an employee to be eligible for gratuity is 5 years)

Gratuity – (6,00,000+2004 x 15 x 5)/ 26 = 28,860(approximately)

Taxable Income: Taxable Income (305,540) = Gross Salary (699,140) – PF (72,000) – Conveyance (19,200) – HRA (300,000) – Professional Tax (2,400)

Income Tax The calculation of income tax using tax slab has been shown in the table below.

Tax Bracket Tax Rate Earnings in this bracket Tax
0-2.5 lakh 0% 2.5 lakh 0
2.5 lakh- 5 lakh 10% 55,540 5,554
5 lakh-10 lakh 20% 0 0
Above 10 lakh 30% 0 0
Taxable Income and Tax 305,540 5,554

Income Tax for your Taxable Income of 305,540.00 is 5,554.00. If 2% Educational cess and 1% Higher and Secondary cess is applied to the Tax calculated below, your total tax would be INR 5,720.62.

Take home salary = Gross salary(6,99,140) – Income Tax(5720.62) – PF(72000) – Prof.Tax(2400) = 6,19,019.38

So your monthly take home salary is 51,585 Rs and Yearly take home salary is 6,19,019 Rs. 

How can one increase one’s take home salary? – Take home salary can be increased with the help of proper tax planning without having to alter the CTC. One must invest in tax saving instruments included in Section 80 C like PPF, ELSS in order to save tax and maximize returns. More on this in another post 😉

Now that you are armed with relevant knowledge about the salary components, the next time you negotiate your salary with the HR, we are certain that you will have the upper hand in the negotiations.

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