To grasp the fundamentals of what a gross salary is, one must be familiar with two key terms: Employee's Provident Fund (EPF) and Cost to Company.
The expense incurred by the business when recruiting a new employee is known as the "Cost to Company," or CTC as it is commonly referred to. It is made up of several components, such as medical insurance, provident fund, dearness allowance, and house rent allowance. These are often the allowances that the employer pays for and adds to an employee's base pay. The Employee Provident Fund, or EPF as it is more widely known, is a social security program designed to help employees. These services include things like health care support, retirement planning, kid-focused education, insurance aid, housing, and transportation reimbursement.
Moreover, Employee Provident Fund Organization [EPFO] guidelines state that each employee must fund their EPF account with a minimum of 12% of their take-home pay. The Ministry of Labor establishes the EPF plan. Thus, using the ideas of CTC and EPF, gross salary is calculated by deducting EPF and gratuity from CTC.
Components of Gross Salary
Gross salary is supplied to employees who receive payment for their services as their CTC (cost to company). The sum that the business will have to pay an employee for a given year is known as the cost to the business. However, it's important to keep in mind that expenses incurred by the business are never equivalent to the salary received by an employee.
The following are the fundamental elements of gross salary:
- Basic Salary: The exact amount given to an employee before any deductions or other components are included is known as their basic salary. Furthermore, the basic pay is never higher than the take-home or gross pay. The advantages that an employee receives in addition to their wage due to their position within the company are known as perks. These advantages can be quite large. Furthermore, according to their nature, these benefits may be taxable or non-taxable.
- Perquisites: These are significant perks that an employee receives as a result of his or her position in a company and are payable in addition to their compensation. Furthermore, depending on the nature of the benefits, they may be both taxable and nontaxable.
- Salary Arrears: The majority of us are familiar with the concept of arrears. Arrears, to put it simply, are the amount you have to pay after receiving a raise or other compensation increase.
What is the Cost to the Company?
The Cost to Company (CTC) is the sum set by the company when recruiting an employee. It includes extra allowances, such as the House Rent Allowance (HRA), Gratuity, Provident Fund (PF), and Medical Insurance, in addition to the base wage.
In other terms, CTC refers to the whole remuneration package of an employee. It is the total amount of money an employer spends on an employee in one year. A CTC is the sum of Direct Benefits (the amount paid to an employee on an annual basis), Indirect Benefits (the amount paid by the employer on behalf of the employee), and Saving Contributions (the amount to which he or she is entitled).
Therefore, CTC = Direct Benefits + Indirect Benefits.
Gross Salary
Gross Salary refers to the amount earned after deducting gratuity and employee provident fund (EPF) from the CTC. In other words, gross salary is the amount paid before taxes or deductions, which includes bonuses, overtime pay, holiday pay, and so on. In India, the EPF is an employee-benefit system recommended by the Ministry of Labour that provides an income to employees in retirement. The EPFO, or Employee Provident Fund Organization, has the ability to issue policies governing EPF, pension, and insurance plans. However, the employer is obligated to contribute at least 12% of the employee's salary to his or her EPF.
An employee can also take the entire amount collected in his or her PF account at the time of retirement, which occurs when the employee turns 55. However, he or she can withdraw the PF amount in the following situations:
- If the employee is moving abroad
- In case the employee retires owing to persistent infirmity
- Termination of Services
PF calculated on Gross Salary
Gross salary is calculated differently for PF computation than it is for payroll. Let us use PF Gross to represent the pay to be included in the PF computation. PF Gross comprises basic, DA, conveyance, other allowances, and so on. It excludes House Rent Allowance, Bonus, and other pay heads that are exempt from PF computation under the PF Act.
Deductions From Gross Salary
Income tax is calculated by subtracting the total wage from the allowed deductions. For example, while calculating taxable income, you must remove the HRA exemption, any house loan EMI, investments under sections 80C and 80D, and other comparable items. Please keep in mind that the taxation process for self-employed and salaried individuals is not the same.
Gross Salaries under Section 17(1)
Section 17(1) defines salary as the following amounts received by an employee from his employer during the previous year.
- Wages;
- Any rise in salary;
- Any fees, commissions, perks, or profits in lieu of or in addition to any salary or wages.
- Section 8O CCD refers to the contribution made by the Central Government or any other employer to an employee's account under a pension system in the previous year.
- Any remuneration received by an employee for unused leave (leave encasement or income in lieu of leave).
- The aggregate of all sums included in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognized provident fund to recognized provident fund.
- Annual accretion to the balance to the credit of an employee participating in a recognized provident fund, to the extent that it is taxable to tax under Rule 6 of Part A.
Conclusion
Section 80D permits taxpayers to deduct medical expenses. Salaried employees can save tax on medical insurance premiums for themselves, dependents, or their families. Employers may pay the health insurance premium on behalf of their employees, which is subsequently taken from their gross compensation. This premium is also eligible for a deduction under Section 80D.
Does the CTC include PF?
Yes, the CTC includes PF. CTC stands for Cost to the Company. If you are an employee, CTC is the amount of money your firm is willing to spend on you over the course of a fiscal year. Direct benefits include your basic income, House Rent Allowance (HRA), Leave Travel Allowance (LT), special allowances, performance bonuses, and so on.
Is the CTC monthly or yearly?
CTC is an employee's total yearly compensation, including all benefits and in-hand wages. It changes according on each employee's base pay, benefits, and variables.
What is a salary gratuity?
Gratuity is an amount paid by an employer to its employees for providing services for at least five years. Gratuity is paid to an employee as part of his or her salary and is regarded as a benefit plan intended to assist the employee in retirement.