The excitement associated with your first job is inexplicable. Undoubtedly, one of the most exciting things about starting a new job is getting that first pay cheque at the end of the month. However, that excitement comes with some confusion owing to the jargon that you come across for the first time with regards to your salary. “The salary mentioned by the company was X rupees, but the amount I received is less than that amount. Where’s the rest?” This is the most common question that one gets on receiving the pay slip. It is usually less than the expectation of a fresher employee. We know the amount of confusion all of this can create.

There are various terms associated with a salary that is perhaps difficult to understand for a fresher. Terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, and insurance often create confusion. One is usually in a state of confusion when one has to calculate take home salary. Hence, we have attempted to delineate all the terms associated with the salary in order to make it simpler for you to grasp the concepts and familiarize yourself with them.

Click here to open our accurate Take Home Salary Calculator

Understanding CTC in your salary structure

The phrase “Cost to Company” or CTC as it is generally referred to, is the total amount that a company spends on an employee. However, in the salary breakup, CTC doesn’t mean the amount that you receive in your pay slip. There are many components in your CTC that you won’t receive. In interviews, companies generally advertise the CTC and not the take home salary. Your CTC is inclusive of your basic pay, direct benefits, indirect benefits, your contribution to savings and tax deductions.

Basic salary

Basic salary is the core of salary and is a fixed part of one’s compensation package. In simpler words, it is the amount paid to an employee and many components are added to or deducted from this amount. A basic salary depends on the employee’s designation and also the industry in which the employee works. Your basic salary will be minus your allowances, reimbursements, insurance and provident fund.

Gross salary

Gross salary is the salary inclusive of your basic salary and allowances.
Gross Salary = Basic Salary + Allowances


An allowance is the amount received by an individual for meeting service requirements. Allowances are given in addition to the basic salary. Allowances depend on companies and various types of allowances are given like HRA, Leave Travel Allowance(LTA), Children’s Education Allowance, Lunch Allowance, Phone Allowance, Travel Allowance among others.


Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills etc. in their salary structure. The money is not received in the salary, but on submission of the bills, reimbursement will be given. Generally, there is an upper limit for every category of reimbursement.

Provident fund or PF

Note: Don’t confuse EPF (Employee Provident Fund) with PPF (Public Provident Fund).

Provident fund is an investment both by the employer and the employee each month, the lump sum amount of which is provided to the employee on retirement.

  • Provident fund contribution is 12 percent of the basic salary and is directly deposited in the employee’s PF account. So, twelve percent of the basic salary gets contributed from the employee and another twelve percent by the employer. Contribution for the provident fund is mandatory for Indian companies.
  • PPF is a voluntary contribution by the employee and is completely controlled by the employee. Your employer has nothing to do with your PPF account. People open a PPF account for two main reasons, one is for tax saving purposes and second for long term investment. This is because PPF provides 8.5% per annum and more importantly, both contribution and maturity amount is tax-free. Apart from the basic fact that PPF is your personal provident fund account and only you can contribute there, EPF contribution is made by you and your employer.


The tax levied on one’s personal income is called Income Tax. If your annual income exceeds the maximum amount which is not chargeable, you have to pay a tax at the rate prescribed under the finance act. Usually, an employee gets his or her salary after the tax is deducted by the employer. This process is called as Tax Deduction at Source (TDS). The company has to issue a Form 16 which contains the details about the salary earned by that employee and the amount of tax deducted. The tax deducted is paid to the government by the company. Professional Tax is the tax charged by the state government in order to let an individual practice a certain profession. The maximum amount payable per year is INR 2,500. It depends on one’s monthly salary and also on the state in which one works. The professional tax levied varies from state to state in India.

Click here to go through the professional tax slab in India (Statewise)

Professional tax is not applicable in the following states and union territories:

Arunachal Pradesh, Andaman & Nicobar, Chandigarh, Dadra & Nagar Haveli, Daman & Diu, Delhi, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Lakshadweep, Nagaland, Punjab, Rajasthan,Uttarakhand, and Uttar Pradesh.

HRA or house rent allowance

Note: Self-employed individuals cannot claim HRA.

It is an amount paid out to salaried employees by companies. Employees can get tax benefits on the amount paid towards accommodations (or home rent) every year. HRA received is not fully exempt from tax. Actual HRA offered will be the lowest of the following:

  • The total amount received as the HRA from the employer in the financial year.
  • Actual rent paid in the year – 10% of the basic salary in the year.
  • 50% of the annual basic salary if staying in a metro city or 40% of the annual basic salary if staying in a non-metro city.- Those who stay in their own house and do not pay rent, cannot claim HRA. Landlord’s PAN is mandatory for HRA exemption if the total rent paid is over Rs 1 lakh per year.

Form 16

It is the proof of employee’s income and tax paid to the government. It is issued under section 203 of Income Tax Act for Tax. The taxpayer has to use the Form 16 to file the Income Tax returns every financial year. Apart from income tax, a professional tax is also paid to the state government of the state where one practices a profession.

Life insurance and health insurance

Many companies provide a health insurance to their employees and their dependents and also a life insurance, the premium for which is borne by the employee and is included in the CTC.


Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job.

  • In India, the basic requirements for gratuity are set out under the Payment of Gratuity Act 1971. The basic requirement for gratuity in India is set out under the Payment of Gratuity Act 1971.
    Dearness Allowance or DA is a living allowance paid to employees and is calculated as a percentage of one’s basic salary. The percentage value depends on the company and this is not mandatory for every company. *Note: To fall under the Act and qualify for gratuity, an employee needs to have at least five full years of service with the current employer, except in the event that an employee passes away or is rendered disabled due to accident or illness, in which case gratuity must be paid. *

  • Gratuity is calculated in terms of the following.
    Gratuity Calculation= [ (Basic monthly Pay + D.A) x 15 days x No. of years of service ] / 26

  • Here, DA is Dearness Allowance which is different for each company.

  • We can assume DA to be zero as Dearness Allowance (DA) is a cost of living adjustment allowance paid only to Government employees, Public sector employees (PSU) and pensioners in Pakistan, Bangladesh, and India.

  • Say your CTC is 6 lakhs per annum and your basic monthly pay is INR 15,000. Then the gratuity that will be deducted every year = 15/26 x 15000 x 1 = INR 8653.

  • Though an employee can receive the gratuity amount only after 5 years, it will be deducted by the employer every year and hence it will get deducted from your CTC.

Understanding FY and AY in your salary breakup

Financial year (FY)

In order to understand tax better, let us understand what a financial year and assessment year means. A financial year is a year as reckoned for taxing and accounting purposes. It commences from April 1 of a year and ends on March 31 of the following year. In the case of filing IT returns, financial year is the previous year. It is the year in which one has earned the income. Hence, if you are filing a return this year, that is 2016, the financial year will be 2015-16.

Assessment year (AY)

Assessment year, on the other hand, is the year in which you file your returns. It is the year in which the income that you have earned in the financial year will be evaluated. For example, if you have earned your income between 1 April 2015 and 31 March 2016, then 2016-2017 will be the Assessment Year. Hence, it is the year in which your tax liability will be calculated on the previous year’s income. As an example, take a look at the tabular data below for better understanding:

Income yearFinancial YearAssessment Year
The amount of tax paid by an individual is dependent on the income range. Let us look at the tax slabs for the financial year 2015-2016 to gain a better comprehension of the tax structure.

According to Arun Jaitley’s Budget 2018 announcement, Tax Slab for individuals for the FY 2018-2019 are as follows for a male or female Indian Resident Individuals below 60 years of age:

Net Income* Income Tax Health and Education Cess
Upto Rs. 2,50,000 Nil Nil
Rs. 2,50,001-Rs. 5,00,000 5% of total income 4% of income tax
Rs. 5,00,001-Rs. 10,00,000 Rs. 12,500 + 20% of total income – 5 lakhs 4% of income tax
Above Rs. 10,00,000 Rs. 1,12,000 + 30% of total income – 10 lakhs 4% of income tax
*Surcharge @10% will be applied for taxable income between Rs. 50 lakhs to Rs. 1 crore and @15% for taxable income above Rs. 1 crore. Jaitley also said that there will be a uniform benefit of Rs. 12,500/- per taxpayer, who have a CTC above Rs. 5,00,000/-.
  • The tax slab for FY 2014-15, FY 2015-16, and FY 2016-17 is the same, as given below.
Net Income*Income TaxEducation CessSecondary And Higher Secondary Education Cess
Up to Rs. 2,50,000NilNilNil
Rs. 2,50,001-Rs. 5,00,00010% of total income exceeding Rs. 2,50,000/-3% of income tax and surcharge1% of income tax
Rs. 5,00,001-Rs. 10,00,000Rs. 25,000/- + 20% of total income exceeding Rs. 5,00,000/-3% of income tax and surcharge1% of income tax
Above Rs. 10,00,000Rs. 1,25,000 + 30% of total income – Rs. 10,00,000/-3% of income tax and surcharge1% of income tax
*Surcharge: It is 12% of the Income Tax, where taxable income is more than Rs. 1 crore. (Marginal Relief in Surcharge will be charged, if applicable).

How do you calculate your take home salary?

The most important question everybody has! You can calculate your take home salary provided you have a few numbers beforehand. We have provided some easy steps to help you calculate your take home salary. This can help you plan your savings ahead of time and also help you maximize your returns.

  • The first step is to find out the Gross Salary which is obtained by subtracting the employer’s contribution to one’s Provident Fund or EPF and gratuity from CTC.
    Gross Salary = CTC – (EPF + Gratuity)
  • Determine Taxable Income: In order to determine the part of your income that is taxable, subtract allowances, professional tax, medical bills, medical insurance, tax saving investments and other deductions from your gross salary.
    Taxable Income = Gross Salary – (Allowances + Medical bills + Medical Insurance + Tax Saving Investments + Other Deductions)
    You can easily calculate Income Tax by referring to the Income tax slab and rates provided above.

-Calculate your Take Home Salary: In order to calculate, you simply need to subtract the Income Tax, Provident Fund (PF) and Professional Tax from the Gross Salary.
Take Home Salary = Gross Salary – (Income Tax + Employee’s PF Contribution(PF) +Professional Tax) = CTC – (EPF + Gratuity) – (Income Tax + Employee’s PF Contribution(PF) +Professional Tax)
Let us understand this better with a help of an example. Let’s assume that your annual CTC is Rs. 8,00,000 for the financial year 2015-16. Your annual conveyance is given as INR 19,200, Basic salary as INR 6,00,000 and HRA as INR 3,00,000. The salary break up will look something like the tables below:

ComponentMonthly (in INR)Yearly (in INR)
Take home51,584.95619,019.38
Income tax476.725720.62
Professional tax200.002,400.00
EPF/PF – contributed by employee (12 % of basic salary which is 600000 )6,000.0072,000.00
EPF/PF – contributed by employer6,000.0072,000.00
Tax savingsMonthlyYearly
TAKE HOME51,584.95619,019.38

Explanation for how the above calculations are made in the salary structure:

  • Gross Salary: Gross Salary (699,140.00) = CTC (8,00,000.00) – EPF (72,000.00) – Gratuity (28,860.00)
  • Gratuity = Basic Pay+ D.A x 15 days x No. of years of service(5) / 26
    Basic Pay – 6,00,000 (Please note that the values used are only for indication. Basic salary may include various components which will differ from company to company)
    D.A – 2004 (It is an assumed value. DA again differs from company to company)
    No. of years – 5 (The minimum number of years for an employee to be eligible for gratuity is 5 years)
    Gratuity – (6,00,000+2004 x 15 x 5)/ 26 = 28,860(approximately)
  • Taxable Income: Taxable Income (305,540) = Gross Salary (699,140) – PF (72,000) – Conveyance (19,200) – HRA (300,000) – Professional Tax (2,400)
  • Income Tax: The calculation of income tax is done using a tax slab, that has been shown in the table below.
Tax BracketTax RateEarnings in this bracketTax
0-2.5 lakh0%2.5 lakh0
2.5 lakh- 5 lakh10%55,5405,554
5 lakh-10 lakh20%00
Above 10 lakh30%00
Taxable Income and Tax 305,5405,554
Income Tax for your Taxable Income of 305,540.00 is 5,554.00. If 2% Educational cess and 1% Higher and Secondary cess are applied to the Tax calculated below, your total tax would be INR 5,720.62.
  • Take home salary = Gross salary(6,99,140) – Income Tax(5720.62) – PF(72000) – Prof.Tax(2400) = 6,19,019.38
    So your monthly take home salary is Rs. 51,585 and yearly take home salary is Rs. 6,19,019.

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