Gross Salary vs Net Salary

Updated on April 11, 2024
Article byHarsh Katara
Edited byHarsh Katara
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Gross Salary and Net Salary

Gross salary is the salary before income tax deduction (Fed and state taxes), Social Security (FICA Tax – payroll tax), and Health care insurance. In contrast, a net salary is a take-home salary credited to the employee’s bank account.

Gross Salary is the amount paid before the deduction of any taxes or other deductions and includes all the bonuses, shift allowance, holiday payHoliday PayHoliday pay is a bonus for employees as they get paid with standard wages even for the day off, such as Christmas or Thanksgiving. It isn't necessary, but some employers offer it as a reward for their employee's contribution to the company.read more, overtime pay, and other differentials. It also excludes the retirement benefits (e.g., 401(k) accounts) and taxes deducted at the source. Benefits (such as group health insurance and another kind of non-cash components that are part of salary are not counted as part of gross salary);

Gross-Salary-vs-Net-Salary

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Gross Salary vs Net Salary (wallstreetmojo.com)

Net salary, commonly known as Take-Home Salary, is the income that the employee will take home once tax, which is deducted at the source and other such deductions such as retirement benefits, as mentioned earlier. Therefore, net Salary is Gross salary less Income Tax deductions, which means Net Salary Income Formula = Gross Salary – Income Tax Deducted at Source – Retirement Benefits.

The salary slip below will help us identify the basic difference between gross and net salary.

gross salary vs net salary 1

Gross Salary vs. Net Salary Infographics

Let’s see the top differences between gross vs. net salary and infographics.

Gross-Salary-vs-Net-Salary-info

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Gross Salary vs Net Salary (wallstreetmojo.com)

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Key Differences

  • Net Salary is considered whenever any employee applies for a loan or checks credit eligibility. However, Gross Salary is considered in certain circumstances, like calculating the Bonus of the employee or Insurance requirement.
  • Also, one can change its Net pay or take-home salary figure, which could vary monthly. The employee has the option to reduce the amount of income tax by following the rules. E.g., if someone invests in insurance, they will be eligible for deductions under the income tax act, and they can increase the net payNet PayEmployees' net pay, often known as take-home pay, is their salary after all deductions.read more in hand. Further Gross salary figure does not change as that is fixed and determined by the company and is mentioned in the employee’s offer letter, but yes, that changes only after receiving annual hikes.
  • For applying for credit cards, the Net salary figure is also considered; based on that; the company decides the credit card limit. One cannot expect to receive the gross salary in their bank account as taxes, or retirement benefits are bound to be there.

Gross vs. Net Salary Comparative Table

BasisGross SalaryNet Salary
DefinitionGross Salary is the income that an employee gets in the form of CTC before considering retirement benefits (e.g., 401(k) benefits), Income Tax deduction.Net Salary is the actual takeaway home salary that an employee gets in its bank account.
ExclusionsRetirement Benefits (e.g., 401(k) benefits), Income Tax, which deducted at source, Shift Allowance, Free Meals if any.This includes everything and deducts all the taxes and other retirement benefits.
ExamplesThis will mostly compromise of Direct Benefits and other indirect benefits as well:
• DIRECT
1) Basic Salary
2) Dearness Allowance (DA)
3) Medical Assistance
4) Vehicle Allowance
5) Mobile Allowance
6) Internet Allowance
• INDIRECT
1) Interest-Free Loans
2) Subsidized Meals
3) Office Space Rent
Net Salary will include everything but only after the following deductions, which are taxes and retirement benefits.
1) 401(k)retirement benefits
2) 403(b) benefits
3) Income Tax deducted at source (Federal taxes)
4) State Taxes
5) Social Security
6) Any Health Insurance premium

Conclusion

So, whenever an employee gets an offer letter from the company, one needs to consider all the above mentioned factors. If they ignore those retirement benefits figures and those form a major part of their CTC, their net or take-home salary will be less than they would expect.

For example, Mr. X got an offer from ABC company wherein the offer letter mentioned that they would pay 9,00,000/- as CTC, which included 90,000 as Medicare and 90,000 as 401(k) contributions401(k) ContributionsA 401(k) Contribution Calculator can help employees figure out how much they will contribute and how much their employer will contribute, depending on the limits. It is a subset of 401(k) in which we first compute the employee contribution amount, which cannot exceed $19,000, and then we calculate the employer contribution amount, which is likewise subject to limits set by the individual's company.read more. Then the employee needs to consider that he would receive an in-hand salary by dividing (9,00,000 less Medicare less 90,000 for 401(k) contributions) / 12 and not 9,00,000 / 12 assuming no federal taxes.

Recommended Articles

This has been a guide to Gross Salary vs. Net Salary. Here we discuss the top 3 differences, infographics, and a comparative table. You may also have a look at the following articles –