What is Net Salary: Calculation & Formula & Explained

Salary is a periodic payment from an employer to its employees for their work as specified in the contract. Want to know about net salary in detail? if yes, then keep reading!

What Is Net Salary?

net salary meaning — (Source: marketing91)

Net salary is actually known as take-home salary. It is an amount credited to an employee’s bank account (a salary account) every month. A firm offers this sum of money to an employee employed in it after deducting components like EPF, professional tax, ESIC, etc. However, some firms do not provide EPF or ESIC, and some states do not levy any professional tax.

Knowing about net salary is critical as this amount helps to take care of EMIs, household expenses, travel expenditure, and various other daily needs.

When a CTC offer is made, you must enquire about net salary as various components in the salary structure may be confusing. If the CTC is good, but the take-home part is less, it may add to financial problems. So, it is always necessary to get things clarified beforehand.

How Is Net Salary Different from Gross Salary?

Here, we have shared the comparison between these two; please check the same below.

Net Salary	Gross Salary
It is the final payment made after deductions for EPF, ESIC, Professional Tax, Income Tax or Tax Deducted at Source and others.	It is an amount paid to a person by an employer before making any deductions.
Net pay is lower than gross pay.	Gross pay is the sum of all benefits and allowances before any deduction.

How to Calculate Net Salary?

To know about net salary, it is important to know how to calculate. Here, we have shared one example for better understanding.

Example -

Arpit works at an EdTech firm. His gross salary yearly is ₹3,50,000. So, what is his net payment? Check the calculation below.

Gross salary is -

Salary Components	Value
Basic Salary	₹30,000
HRA	₹1,20,000
LTA	₹60,000
Special Allowance	₹1,40,000

So, the Total (A) = ₹3,50,000 (Sum of all the components)

Deductions are-

Deduction Components	Value
Employee Provident Fund	₹21,600
Profession Tax	₹2,400
Insurance Premium	₹3,000
Special Allowance	₹1,40,000

Total (B) = ₹27,000 (Sum of all deductions)

Now, you will have to just subtract the gross salary with the total of all deductions.

Net Salary = Total (A) – Total (B)

= ₹ (3,50,000 - 27,000)

= ₹3,23,000

So, the net pay of Arpit is ₹3,23,000

What Are the Factors Influencing the Calculation of Net Salary?

The calculation of net salary depends on the following factors mentioned below.

Country: Salary structure varies with each country based on the various socio-economic factors. Hence, the salaries in the USA will not be similar to that of India.
Company: Salaries are primarily based on a firm’s policies and turnover. It also depends on the product and its demand and supply. For example, the salary offered by TCS will not be the same as that of a salary offered by a start-up. This will affect the net pay as well.
Industry sector: Salary structure varies from one market sector to another. For instance, the salary in a BPO will be different from the one offered by a media firm. Accordingly, it will impact your net salary calculation as some firms may not pay certain benefits not paid by another firm.
HR policies of a company: Policies made by an HR of a firm also impact pay structure. In some companies, the pay structure can be very employee-centric, like having a higher basic pay and a range of employee benefits.
Employee designation: Finally, your designation and job role will also impact a pay structure. For instance, the CTC offered to a software developer will differ from the CTC offered to a Lead Developer. Thus, the net pay will also vary.

What Are the Components of Net Salary?

Net pay is the amount after various deductions like PF, Income Tax, etc. We have mentioned the sum total of gross salary is to be deducted from eligible deductions to get the net pay.

The components that get deducted from the gross salary include:

Employee’s PF Contribution
Professional Tax (state-specific)
Income Tax or TDS

Now, net salary is the take-home part after the following deductions as mentioned above. However, some of the components like incentives and overtime payments are variables and not fixed.

Is Net Pay Essential to Apply for Loans and Insurance?

While assessing your income, a bank will consider net pay and not gross pay. After reviewing your take-home salary, a bank will approve loans.

In the case of loans and insurance, one has to pay EMIs or a certain premium. To be able to pay them will require financial stability through a substantial in-hand salary. Thus, a take-home salary is critical to a loan or insurance application and not a gross salary.

That’s all for now! Knowing about net salary is very critical. We are sure that you are now completely aware of net pay, its calculation and its importance.

Frequently Asked Questions

✓ Is net salary different from take-home salary?

Net salary is not different from take-home salary as both indicated to the figure you take home after all tax and other applicable deductions are done.

✓ Is TDS deducted from take-home salary?

TDS stands for tax deducted at source. It is deducted from your gross pay along with all other applicable deductions. After subtracting all these, you arrive at your net salary or take-home salary.