Types of Salary in HRM

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In Human Resource Management, organizations pay salaries to the employees for their services. The salary paid to the employees includes several components such as basic salary, allowance, gross salary, and net salary.
Salary structure is the detail of the different components of the salary. Any change in the salary structure can significantly impact the tax structure of an employee. Having adequate knowledge of the salary earned is crucial in understanding their basic pay, gross pay, and net salary.

What is CTC

Cost to the company is the amount spent by an organization to hire an employee. It includes multiple elements such as HRA (House Rent Allowance, Provident Fund (PF), Medical insurance, etc.) added to the basic salary. These allowances include free meals, cab service, etc. All these elements, when combined, form the cost to the company. In short, CTC covers everything from hiring and sustaining an employee in the company. CTC is variable pay, and when CTC varies, the take-home or net salary varies.

The Common Salary Components in HRM

The different salary components are the basic salary, gross salary, and the net or in-hand salary. These components add to the total cost of the firm spent on hiring an employee.

Basic Salary

Basic salary is the base income of an individual paid for their contribution to the company, and it remains constant as a fixed part of an employee’s compensation package. It differs from employee to employee based on their position in the company. Apart from differing designation, it may vary from one industry to another. It does not include bonuses, allowances, or any other benefits.

Gross Salary

Gross salary is paid to the employee after deduction of the EPF and gratuity from the CTC. In simple terms, gross salary is the amount given to the employees before tax deductions or other deductions are made and includes bonuses, overtime pay, holiday pay, and other credentials. EPF or Employee Provident Fund is the employee-benefit scheme that every organization is bound to give to its employees. An employer has to contribute a certain percent of an employee’s salary toward their EPF. The employee can withdraw this amount at the time of their retirement or under any of these three circumstances:

  • Termination of services
  • Retirement due to disability
  • Migration for taking employees abroad

Net Salary or In-hand Salary

Net or take-home salary is the amount an employee receives after making tax and other deductions. It refers to the in-hand salary calculated after deducting income tax, professional tax, and other business policy deductions. It may differ according to the different company policies. 

Net salary = Basic salary + HRA + Allowances – Income Tax – EPF – Professional Tax.

The Difference between CTC and In-hand Salary

An employee may notice a difference between the salary offered at the time of joining, i.e., the CTC, and the in-hand salary. Employees often believe that the CTC offered and the in-hand salary will be the same. However, there is a difference between the two. Deductions from the gross salary result in the difference between the initially offered CTC and the actual in-hand salary. CTC is the amount an organization spends on an employee, and the net salary is what an employee receives after every deduction.

How to Calculate In-hand Salary

In-hand or take-home salary is calculated using a calculator, which uses various factors such as CTC, bonus, and other details. In-hand salary is the take-home pay after all the deductions. 

To calculate in-hand salary:

  • Calculate the gross salary by subtracting the EPF and Gratuity from the CTC
  • After this, calculate the taxable income by making required deductions from the total income
  • Income tax is calculated by adding the slab rate on calculated taxable income
  • In-Hand Salary = Monthly Gross Income – Income Tax – Employee PF – Other Deductions if any.

Frequently Asked Questions(FAQ)

What is the meaning of CTC?

Cost to the company is the amount spent by an organization to hire an employee. 
It includes multiple elements such as HRA (House Rent Allowance, Provident Fund (PF), Medical insurance, etc.) added to the basic salary. 
These allowances include free meals, cab service, etc.

What does gross pay include?

Gross salary is the amount paid to the employee after the EPF and gratuity are subtracted from the CTC. 
In simpler terms, gross salary is the amount given to the employees before tax deductions or other deductions are made and is inclusive of bonuses, overtime pay, holiday pay, and other credentials.

How is net salary calculated?

Net salary or take-home salary is the amount received by an employee after tax and other deductions are made.
Net salary = Basic salary + HRA + Allowances – Income Tax – EPF – Professional Tax

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