Salary Formula

Salary Formula (Table of Contents)

• Salary Formula
• Examples of Salary Formula (With Excel Template)
• Salary Formula Calculator

Salary Formula

The word salary has been derived from the Roman letter “Salarium” which was given to the Roman soldiers in ancient times in addition to the wages they were entitled off. The salary calculator is really helpful and vital to calculate and know the growth status of the employee and to estimate the additions and deductions which are being made by the employer in one’s employee salary. The salary consists of various components and there is a difference between the gross salary received and the net salary received. An employee’s salary can be structured in the following manner:-

• Basic Salary
• House Rent Allowance
• Transport Allowance
• FBP Allowance
• Statutory Bonus
• Provident Fund
• Income Tax
• Insurance

A formula for Salary Calculator is given by:

The salary component also varies as per the company’s policies. Some companies make deductions other than the above deductions whereas some companies do not make certain deductions. As per the Indian Labour law, we operate in a cost-to-company (CTC) model where there are most deductions in a salary if the person is employed under a formal sector. Whereas, informal sector employees can take away their full salary quota.

Examples of Salary Formula (With Excel Template)

Let’s take an example to understand the calculation of the Salary in a better manner.

Salary Formula – Example #1

Mr. X has a salary with the following salary components. Calculate the Gross Salary and Net Salary of Mr. X.

Gross Salary is calculated as:

• Gross Salary = 18,775 + 9,387 + 1,600 + 26,184 + 1,883
• Gross Salary = 57,829

Net Salary is calculated as:

• Net Salary = 57,829 – (2,100 + 2,300)
• Net Salary = 57,829 – 4,400
• Net Salary = 53,429

The Gross salary of Mr. X is the summation of Basic, HRA, Transport Allowance, PBP allowance, and statutory Bonus which comes to around 57,829. Whereas net salary is computed as Basic Salary minus Income tax and Provident Fund which comes to around 53,429.

Salary Formula – Example #2

Calculate the Gross Salary and Net Salary of the following salary components.

Gross Salary is calculated as:

• Gross Salary = 480,000 + 48,000 + 96,000 + 12,000 + 12,000 + 12,000
• Gross Salary = 660,000

Net Salary is calculated as:

• Net Salary = 660,000 – (50,000 + 57,600)
• Net Salary = 660,000 – 107,600
• Net Salary = 552,400 

Here the basic salary will be calculated as follows: Basic Salary + Dearness Allowance + HRA Allowance + conveyance allowance + entertainment allowance + medical insurance. Here the gross salary 660,000. The deduction will be Income tax and provident fund. So,  the net salary comes to around 552,400.

Salary Formula – Example #3

Calculate the Gross Salary and Net Salary of the following salary components.

Gross Salary is calculated as:

• Gross Salary = 432,000 + 43,200 + 86,400 + 10,800 + 10,800 + 10,800
• Gross Salary = 594,000

Net Salary is calculated as:

• Net Salary = 594,000 – (45,000 + 51,840)
• Net Salary = 594,000 – 96,840
• Net Salary = 497,160

Here the basic salary will be calculated as follows: Basic Salary + Dearness Allowance + HRA Allowance + conveyance allowance + entertainment allowance + medical insurance. Here the gross salary is 594,000. The deduction will be Income tax and provident fund. Therefore, the net salary comes to around 497,160.

Explanation

• Basic Salary – Basic salary is the basic income of an individual and is the base salary through which all over components of income are derived.
• Housing Rent Allowance – This is the allowance that an employee gets for his/her housing and rental expenses. Generally, it is 50% or more of the basic salary.
• Transport Allowance – It is the allowance that an employee gets for transport and commuting.
• FBP Allowance – Flexible benefits plan refers to the ancillary benefits that the employee is entitled to like medical, ltc, conveyance, etc.
• Statutory Bonus – The bonus is generally 8.33% of the employee’s salary and the maximum statutory bonus that is allowed is 20% of the employee’s salary.

Deduction

• Provident Fund – It is a deduction that every employer needs to deduct as per government law.
• Income Tax – Income tax is deductible as per the income tax slabs prevailing in India.
• Insurance – Insurance is deductible as per the designation, employee level, and years of experience of an employee.

Relevance and Uses of Salary Formula

The salary calculator can be of the following use:-

• The salary calculator tells the employee about the growth. And if any deduction is not clear to the employee, then he/she can seek the help of the human resource department in order to get it clarified.
• The salary calculator also tells the employee about his/her standing in the company and also determines whether the employee is underpaid or overpaid.
• The salary calculator is useful when the company is planning and implementing the initiative for Human resource cost reduction. Moreover, the calculator can be useful in computing salaries and the compensation paid to the staff and the top management and can help to identify the roles which are overpaid or redundant.
• The calculator also reduces the workload of the human resource department which needs to compute the salaries of different individuals on payday.

Salary Formula Calculator

You can use the following Salary Calculator

Recommended Articles

This has been a guide to Salary Formula. Here we discuss how to calculate the Salary along with practical examples. We have also provided Salary Calculator with a downloadable excel template. You may also look at the following articles to learn more –

1. How to Calculate Opportunity Cost?
2. Contribution Margin Formula
3. Calculation of Variable Costing
4. Retained Earnings Formula
5. Contribution Margin Income Statement