A lot many us, especially fresher Job seekers are confused between the terms salary, net salary, gross salary and cost to a company. The entire terminology is a pure confusion for most of us. When you get your first job, the excitement of merely getting the job supersedes all other thoughts and no one even cares to understand what these terms in the offer letter mean to them.
When someone gets a job in a campus interview, what they look at the end of the offer letter is the CTC (Cost to Company), which is often mistaken as their monthly salary when divided by 12 months. This is a sheer mistake. The new employees are educated but they have an immense lack of financial education and this is where this article would serve them.
How People Earn Money?
In India, there are three broad categories of how people earn money here:
- by running a business
- by working for themselves as Self-Employed individuals
- Earn as an employee by working for someone else
In this article, we would focus more on the third category, i.e. working as an employee. When you work for a company, you are normally considered as an employee and you get a fixed wage/salary along with perks and emoluments.
What is Salary?
The money that an employee gets for working for his/her job is termed as Salary. This is usually fixed and decided at the time of joining an organization and is revised from time to time, usually on a yearly basis.
Even if someone is working as a self-employed professional or a freelancer for a company, the amount that he gets per month for his work/contribution is termed as salary. A salary has many parts within each, which we would cover too in this article.
The word has its origin from around 1350-1400 era, where in those days, salt was a valuable commodity of day to day lives and this is considered to be given to Roman soldiers who would buy their living by the barter system.
What are the Components of Salary?
The salary consists of a few components like those given below:
- Basic Salary: As the name tells us, this is the basic amount that you are paid for your duties and your basic salary forms other components of your salary. This is considered to be the basis in deciding your perks and allowances. This is a fixed part of the compensation.
- Perquisites: There are certain facilities that the employer provides to their employees free of cost. Such components of remuneration are known as Perquisites. These benefits can also be provided to the employees at concessional rates. So
Are Perquisites Taxed?
Perquisites are non-cash components of the salary. Department of Income Tax evaluates this section of salary a little differently. Only a certain value of taxes are associated with perquisites. The calculation of it may, however, differ from one category to category. There are namely two deductions which happen out of your salary, which is a compulsory deduction and optional deduction.
What is Provident Fund Contribution?
Provident Fund contribution is one aspect that most of the employees are confused about. To understand it, you need to understand it from the basics. Provident Fund contribution has two sections of it.
And the second contribution of the same amount goes from your employer. Both these contributions keep accumulating and growing at the interest rates decided by the Provident Fund body. This is the amount that you can withdraw any time after you leave your job or keep it for the future.
Know The Difference Between Salary, Net Salary, Gross Salary, Cost-to-Company
As mentioned in the title paragraph of this article, there are various parts of salary. We would elaborate on them one by one:
- Gross Salary: this is the amount that an employee receives after adding all allowances, perquisites and other components including the basic salary. This is the amount that accumulates before any deductions like PF and taxes.
- Net Salary: If you subtract all possible deductions from your gross salary, what is left is your net salary.
- Take Home Salary: Take home salary is what you get in your bank account.
- The Cost to Company: This is often a confusing term. The employers use this term to calculate how much will be the cost of a particular employee if the latter is rendering his/her services to the company. Compulsory deductibles are a major part of the CTC.
Deductions like medical insurance, PF, etc. are a part of the CTC. In CTC, you would find many parts which would in no way affect your take-home salary, however, they are certainly the costs that your company spends on you.
In simpler words, Cost to company looks like the following:
Cost to Company = Gross Salary + Benefits
Can take Home Salary to be Increased?
Yes, your take-home salary can be increased and it is certainly legal. If you plan your taxes effectively, you can increase your take-home salary and that is very much dependent on how you plan your taxes. If you are investing in certain investment tools that are exempted under section 80C of income tax, you would save a lot of money and in turn increase your take-home salary.
What is a Pay Slip?
Especially if you are a fresher and entering a job, you should be knowing what is a pay slip is, what are its relevance and what are the components of a pay slip. A pay slip is a record/document that your employer issues for you and it includes all components or your salary including your basic salary, gross salary, benefits, deductions, taxes and take home salary. A pay slip is a record that you have got this salary during a particular month and can be used for taking loans and verifying your salary.
What is Form 16?
Form 16 is issued by the organization and it comprises of the salary earned by the employee and the tax deductions applicable to their salary. Form 16 merely is proof that the employee has paid taxes during that period for whatever salary he/she has earned.
We hope that we have been able to help you understand few core terms of your earning and deduction and it would help you plan your finances in an effective manner.