How Is Salary Calculated in India? CTC vs Gross vs In-Hand

Salary in India is three numbers, and they are always in the same order: CTC is the largest, gross salary sits in the middle, and in-hand pay is the smallest. CTC (cost to company) is everything the employer spends on you in a year, including its own PF contribution and gratuity. Gross salary is CTC minus those employer-side costs. In-hand pay is gross minus your own deductions — your PF, ESI if you are covered, professional tax and income tax.

Most arguments about salary between a small employer and a new joiner come from one side quoting CTC and the other hearing in-hand. Writing all three numbers on the offer letter ends that argument before it starts.

The building blocks

• Basic pay. The anchor. PF, gratuity and often HRA are calculated from it.
• House rent allowance (HRA). Commonly 40% of basic, or 50% in the metros; partly tax-exempt under the old tax regime if the employee pays rent.
• Other allowances. Special allowance, conveyance, and so on — the balancing figure.
• Employer contributions. PF (12% of PF wages) and, where the employee is covered, ESI (3.25% of gross). These are part of CTC but never part of take-home pay.
• Gratuity. Many employers include a provision for it in CTC, commonly 4.81% of basic — the 15/26 of a month per year of service, expressed as a percentage.

The statutory deductions

• Employees' Provident Fund: 12% of PF wages from the employee, and 12% from the employer. Of the employer's 12%, 8.33% goes to the pension scheme (EPS) on wages up to ₹15,000 a month — at most ₹1,250 — and the rest to the employee's PF account.
• Employees' State Insurance: 0.75% from the employee and 3.25% from the employer, for employees whose gross wages are ₹21,000 a month or less.
• Professional tax: a state tax, deducted monthly in the states that levy it, capped by the Constitution at ₹2,500 a year.
• Income tax (TDS on salary): deducted monthly on the employer's estimate of the year's tax, under whichever regime the employee chooses.

A worked example

Take a monthly gross of ₹30,000, split as basic ₹15,000, HRA ₹6,000 and special allowance ₹9,000, in a state with professional tax of ₹200 a month, and assume no income tax is due.

• Employee PF: 12% of ₹15,000 = ₹1,800
• ESI: not applicable, because gross is above ₹21,000
• Professional tax: ₹200
• In-hand: ₹30,000 − ₹1,800 − ₹200 = ₹28,000
• Employer PF: another ₹1,800; gratuity provision at 4.81% of basic ≈ ₹722
• Monthly CTC ≈ ₹32,522, or about ₹3.9 lakh a year

So a "₹3.9 lakh CTC" offer and a "₹28,000 a month" salary describe the same job. Both are true; only one of them is what the employee will see in the bank.

What the labour codes changed

The four labour codes came into force on 21 November 2025. The change that matters for salary structure is the single definition of "wages" in the Code on Wages: allowances excluded from wages are limited to half of total remuneration, and anything above that is added back. In practice, a structure where basic (with DA) was a small slice of the salary now produces a larger wage base for PF, gratuity and other benefits. Published guides word the 50% test differently, so check your structure against the Code's own text with your CA rather than a summary — this one included.

Who this does not apply to

Very small employers may not yet be covered by PF or ESI at all — coverage depends on headcount and, for ESI, on the area being notified. Consultants paid on invoices are not on payroll; they are paid professional fees, with TDS deducted at a different rate.

A test you can run this week

Take one employee's offer letter and one month's payslip. Can you reconcile the CTC on the letter to the in-hand on the slip, line by line, in under five minutes? If not, neither can the employee — and every unexplained gap reads to them as money withheld.

Grovia's payroll calculates HRA, the employee's PF on the basic actually earned, and pro-rates salary by attendance, then emails a payslip when the month is marked paid. ESI and income tax are entered by hand, and it does not yet calculate the employer's PF share or professional tax, or produce a bank transfer or PF return file — so a firm with a large covered workforce will still want a payroll specialist alongside it.

Grovia is a business platform built for Indian service companies — leads, quotations, invoicing, projects, HR and support in one place. Start a free trial and see whether it fits the way you already work.

Figures checked on 27 October 2026. Tax and labour rules change; confirm the current position with your CA before you act on it.

Frequently Asked Questions

What is the difference between CTC and in-hand salary?

CTC includes everything the employer spends, such as its own PF contribution and gratuity. In-hand salary is gross pay minus the employee's own PF, ESI, professional tax and income tax.

How is PF calculated on salary?

12% of PF wages from the employee and 12% from the employer. Of the employer's share, 8.33% of wages up to ₹15,000 a month goes to the pension scheme and the rest to the PF account.

Who has to pay ESI?

Employees in covered establishments earning gross wages of ₹21,000 a month or less. The employee contributes 0.75% and the employer 3.25%.

Does basic pay have to be 50% of salary now?

Under the labour codes in force since 21 November 2025, allowances excluded from "wages" are limited to half of total remuneration, which in effect pushes the wage base towards half. Confirm the exact treatment of your structure with your CA.

Is gratuity part of CTC?

Often, yes. Many employers include a gratuity provision, commonly 4.81% of basic, in the CTC they quote, even though it is paid only when the employee leaves after becoming eligible.