Why the number on your offer letter is not what you take home
Gross salary and in-hand salary are two of the most important terms in your payslip, yet many employees use them interchangeably. Understanding the gap between the two helps you budget, compare job offers, and plan your finances without surprises.
Key Takeaways
- Gross salary is your total earnings before any deduction; in-hand is what is credited to your bank.
- Typical deductions include Employee PF (12% of basic), income tax (TDS), and professional tax.
- Two people with the same gross can have different in-hand pay due to tax regime and salary structure.
- Always plan your budget and EMIs using in-hand salary, not gross or CTC.
- When comparing offers, ask for an estimated in-hand and breakup of fixed vs variable.
What Is Gross Salary?
Gross salary is the total salary you earn in a month or year before any statutory or voluntary deductions. It includes basic salary, house rent allowance (HRA), special allowance, conveyance, medical allowance, and any other fixed or variable pay that forms part of your earnings. Employers use gross salary to calculate provident fund (PF), income tax (TDS), and other deductions. It is the figure you often see on your offer letter or at the top of your payslip under "Gross" or "Earnings".
What Is In-Hand Salary?
In-hand salary (also called take-home or net salary) is the amount actually credited to your bank account after all deductions. These deductions include employee contribution to EPF, income tax as per your regime, professional tax (if applicable in your state), and any other voluntary or company-specific deductions such as group insurance or loan repayments. In-hand salary is what you use for daily expenses, rent, EMIs, investments, and savings. It is always less than or equal to gross salary.
How Deductions Reduce Gross to In-Hand
- Employee EPF: Usually 12% of basic salary, deducted every month and sent to your PF account.
- Income tax (TDS): Calculated on taxable income after considering your regime (old or new), 80C, 80D, HRA, etc.
- Professional tax: State-specific; typically ₹200–₹300 per month in states where it applies.
- Other deductions: Group insurance, meal card recovery, loan EMIs, or any salary advance repayments.
Simple Comparison Example
- Gross salary: ₹60,000 per month (basic ₹30,000 + allowances ₹30,000)
- Employee PF (12% of basic): ₹3,600
- Income tax (approx.): ₹4,000–₹6,000 depending on regime and investments
- Professional tax: ₹200
- Total deductions: ₹7,800–₹9,800
- In-hand salary: ₹50,200–₹52,200 per month
Why Two People With Same Gross Can Have Different In-Hand
Two employees with the same gross salary can take home different amounts because of differences in tax regime (old vs new), investments under 80C and 80D, HRA exemption (whether they pay rent and submit proof), and other allowances. Salary structure also matters: a higher basic increases PF deduction but can improve long-term benefits; a higher HRA component can reduce tax if you claim exemption. So when comparing jobs, always compare estimated in-hand and the breakup, not just gross or CTC.
Why Understanding the Difference Is Important
Knowing the difference helps you compare job offers correctly, plan monthly budgets and EMIs, and avoid overcommitting to expenses. It also helps you optimize your salary structure with HR—for example, using tax-free allowances or adjusting basic and HRA—so that you maximize in-hand without violating tax rules. Always use an in-hand salary calculator to estimate take-home before accepting an offer or planning a big expense.
Gross salary in offer letters and appointment letters
When you receive an offer, the letter may mention gross monthly salary, CTC, or both. Gross monthly is your earnings before deductions; multiply by 12 to get annual gross. CTC is almost always higher than annual gross because it includes employer PF, gratuity, and other cost-to-company elements. Do not assume your in-hand will be gross minus a small amount; typically 25–35% of gross goes in deductions. Ask HR for an estimated in-hand or a sample payslip so you can plan your finances accurately from day one.
How basic salary affects both PF and take-home
Basic salary is the core component on which PF and gratuity are calculated. A higher basic means higher employee PF deduction (12% of basic), so your immediate in-hand goes down. But it also means higher employer PF (your money in the PF account), better gratuity accrual, and often a higher base for annual increments. Some companies cap basic at 40–50% of CTC to keep PF liability low; others allow a higher basic for long-term benefit. There is no single best structure; it depends on whether you need more cash now or want to maximise retirement and terminal benefits.
Allowances that are fully taxable vs partly exempt
- HRA: Partly or fully exempt if you pay rent and submit receipts; otherwise fully taxable.
- Conveyance: Up to a limit (e.g. ₹1,600/month) was historically exempt; check current rules.
- Special allowance: Usually fully taxable unless structured as reimbursement.
- Medical reimbursement: Exempt up to a limit per year if you submit bills.
- Leave travel allowance (LTA): Exempt for travel costs as per rules, typically once in a block of years.
What happens when you get a raise or bonus
When your gross salary increases, your deductions also change. Higher basic means higher PF deduction. Higher total income may push you into a higher tax slab, so TDS increases. After a raise, use the in-hand calculator again to see your new take-home. Bonuses are usually taxed as salary income and may be subject to higher TDS if they are paid in a single month. Plan your budget and EMIs based on your regular monthly in-hand, not including bonus, unless you have a very stable bonus history.
Planning loans and EMIs using in-hand salary
Banks and lenders use your in-hand salary (often visible on bank statements or payslips) to determine loan eligibility. They typically allow 40–60% of in-hand as the maximum EMI obligation. So if your in-hand is ₹75,000, your total EMIs might be capped around ₹30,000–₹45,000. Using gross or CTC for this calculation is wrong and can lead to over-borrowing. Always base your loan applications and personal budget on net take-home, and leave a buffer for emergencies and savings before committing to large EMIs.
Final Thought
Focus on in-hand salary when planning expenses and savings. Use gross salary as a reference for understanding how much is being deducted and where it goes—PF, tax, and other benefits. For loans and budgets, the number that matters is what hits your account every month.