Workers often focus on gross salary figures, but deductions such as tax, provident fund, and insurance significantly reduce the take-home pay, affecting budgeting and savings. Experts highlight how different salary structures and tax regimes influence net income.
The figure on an offer letter is rarely the amount that reaches a worker’s bank account. Gross salary is the headline number, but net salary, also known as take-home pay, is what remains after tax, provident fund contributions and other deductions are taken out. That gap can be large enough to affect budgeting, savings and tax planning, according to Kuvera’s explainer, which is echoed by guidance from Forbes Advisor, Indeed and Xero.
Gross salary is the total pay before deductions. In the Indian context, it commonly includes basic salary, house rent allowance, dearness allowance, special allowances and performance bonuses. It is not the same as cost to company, or CTC, because CTC also includes employer-side items such as provident fund, gratuity and insurance, which do not usually land in an employee’s account. Kuvera says a simple way to estimate gross pay is to add basic salary, house rent allowance, other allowances and bonuses.
Net salary is the amount credited after deductions, and the list can include income tax deducted at source, employee provident fund, professional tax where it applies, employee state insurance, insurance premiums and loan repayments. Kuvera sets out a step-by-step approach: start with gross salary, subtract tax, then provident fund, then professional tax and finally any other deductions. For example, on a monthly gross salary of ₹75,000, deductions of ₹3,600 for provident fund, ₹200 for professional tax and ₹4,000 for tax would leave net pay of ₹67,200.
The size of the take-home pay depends heavily on the salary structure and the tax regime selected. Kuvera says basic pay is often expected to make up 40% to 50% of CTC, and under India’s new labour codes basic pay must be at least 50% of CTC, which can raise retirement-linked savings but reduce immediate take-home pay. The publication also notes that the new tax regime allows a standard deduction of ₹75,000, while the old regime may offer relief through sections such as 80C, 80D and house rent allowance claims. Professional tax, which is capped at ₹2,500 a year and is not levied by every state, can also be claimed as a deduction under both regimes.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
