There is no single salary calculation formula. There are three, applied in order, and most people who try to check their own payslip get the wrong answer because they collapse them into one.
This is the whole sequence — CTC to gross, gross to taxable, taxable to net — with every intermediate figure shown on a real ₹12,00,000 package for FY 2026-27, and then again at ₹20,00,000 where income tax actually starts to bite. Nothing is rounded away and nothing is skipped, so you can follow it line by line against your own salary annexure.
The Three Formulas, In Order
Every payroll calculation in India runs through these three steps. Each one has its own inputs, and the output of one is the input to the next.
| Step | Formula | What it answers |
|---|---|---|
| 1 | Gross = CTC − Employer PF − Gratuity | What is actually paid to you |
| 2 | Taxable = Gross − Exemptions − Standard Deduction | What the tax is charged on |
| 3 | Net = Gross − Employee PF − Professional Tax − TDS | What reaches your bank account |
Two things about this set are worth fixing in mind before going further.
Employer PF and gratuity leave the calculation at step 1 and never return. They sit inside CTC, they are real money spent on you, and they are not part of gross salary. Adding them back anywhere later is the single most common error in a hand calculation.
Step 2 does not feed step 3 directly. Taxable income is a tax construct. It exists only to produce a tax figure, and that tax figure — as monthly TDS — is what enters step 3. The taxable income number itself never appears on your payslip.
Step 1 — CTC to Gross Salary
Cost to Company is the employer's total annual outlay. Two items inside it are contributions rather than payments, and both come out before you reach gross.
Employer Provident Fund. 12% of Basic + DA, capped at the wage ceiling. The ceiling rose to ₹25,000 a month, so on any Basic at or above that level the employer's share is a flat ₹3,000 a month — ₹36,000 a year — regardless of how large the package is.
Gratuity accrual. 4.81% of Basic + DA. The rate comes from the statutory formula: fifteen days' wages for each completed year, on a 26-day month, spread across twelve months — 15 ÷ 26 ÷ 12 = 4.81%. Most employers accrue it monthly, which is why the annual figure is a rounded monthly amount multiplied by twelve rather than an exact percentage of the annual Basic.
On a ₹12,00,000 package with Basic at 50%:
| Line | Monthly (₹) | Annual (₹) |
|---|---|---|
| CTC | 1,00,000 | 12,00,000 |
| Less: Employer PF | 3,000 | 36,000 |
| Less: Gratuity accrual | 2,349 | 28,188 |
| Gross salary | 94,651 | 11,35,812 |
₹64,188 a year — 5.3% of the package — has already gone, and no deduction has been applied yet. On a larger package the gratuity share grows while the PF share stays flat at ₹36,000, because the ceiling does not move with your salary.
Step 1b — Splitting Gross Into Components
Gross is a total; payroll needs the parts. The split is a company decision, not a legal one, but it is constrained at the bottom by the Code on Wages.
The common structure puts Basic at 50% of gross, HRA at 50% of Basic for metro cities, and the remainder into allowances. On our ₹11,35,812 gross:
| Component | Basis | Monthly (₹) | Annual (₹) |
|---|---|---|---|
| Basic + DA | 50% of gross | 48,826 | 5,85,912 |
| HRA | 50% of Basic (metro) | 24,413 | 2,92,956 |
| Other allowances | Balancing figure | 21,412 | 2,56,944 |
| Gross | 94,651 | 11,35,812 |
HRA is 50% of Basic in the eight cities that now carry metro status and 40% elsewhere. That eight-city list is wider than the four most salary guides still quote — the HRA calculator applies the current list.
Step 1c — The Statutory Wage Floor
Section 2(y) of the Code on Wages, 2019 defines wages as Basic, dearness allowance and retaining allowance, and then adds a floor: if the excluded components — allowances, HRA, bonus and the rest — exceed 50% of total remuneration, the excess is deemed to be wages.
The practical effect is that setting Basic below 50% does not reduce the base on which PF and gratuity are worked out. It is added back. In our example the statutory wage figure is ₹5,85,924 a year against a Basic of ₹5,85,912 — the same number, because Basic is already at the floor.
This is why the old structuring trick of pushing Basic down to 30% or 35% no longer produces a saving. It changes the labels on the payslip and leaves the contributions where they were. The salary breakup calculator shows the deemed figure alongside the stated one.
Step 2 — Gross to Taxable Income
This is where the two regimes part company, and where hand calculations most often go wrong.
New regime. One subtraction. Standard deduction of ₹75,000 from gross. HRA exemption, 80C, 80D, LTA and Professional Tax are all unavailable.
11,35,812 − 75,000 = 10,60,812
Old regime. Four subtractions, in this order:
- HRA exemption under Section 10(13A) — the least of actual HRA, 50% of Basic in a metro city, or rent paid less 10% of Basic
- Standard deduction of ₹50,000 under Section 16(ia)
- Professional Tax under Section 16(iii) — deductible only here, never in the new regime
- Chapter VI-A deductions — 80C including your own PF, 80D, and the rest
At ₹12,00,000 the new regime produces taxable income of ₹10,60,812, and the Section 87A rebate covers tax on taxable income up to ₹12,00,000 — so the tax is nil. That is worth stating plainly: on a ₹12 lakh package under the new regime, with a standard 50% Basic, the TDS line is zero.
Step 2b — Taxable Income to Tax
Nothing happens at ₹12,00,000, so the slab arithmetic needs a package where it does. Here is ₹20,00,000 under the new regime, where taxable income works out to ₹18,42,036.
| Slab | Rate | Amount in slab (₹) | Tax (₹) |
|---|---|---|---|
| Up to 4,00,000 | Nil | 4,00,000 | 0 |
| 4,00,001 – 8,00,000 | 5% | 4,00,000 | 20,000 |
| 8,00,001 – 12,00,000 | 10% | 4,00,000 | 40,000 |
| 12,00,001 – 16,00,000 | 15% | 4,00,000 | 60,000 |
| 16,00,001 – 18,42,036 | 20% | 2,42,036 | 48,407 |
| Tax before cess | 1,68,407 | ||
| Health & Education Cess | 4% | 6,736 | |
| Total tax | 1,75,143 |
Worked by hand the total is ₹1,75,143; payroll systems that round each slab to the rupee return ₹1,75,140. A few rupees either way is normal and is squared off in your return.
The slabs are marginal, not average. The 20% applies only to the ₹2,42,036 above ₹16,00,000, not to the whole income — a distinction that matters whenever someone tells you a raise pushed them into a higher bracket and left them worse off. It cannot.
Monthly TDS. ₹1,75,143 ÷ 12 = ₹14,595 a month, assuming a full financial year. Join mid-year and the same annual figure is spread over the months remaining, so the monthly deduction is larger.
Step 3 — Gross to Net Pay
Three deductions come off gross. Note that taxable income plays no part here — only the tax it produced.
Employee PF. 12% of Basic + DA, on the same ₹25,000 ceiling as the employer share. ₹3,000 a month.
Professional Tax. A state levy, not a central one. Karnataka charges ₹200 a month for eleven months and ₹300 in one, giving ₹2,500 a year. Maharashtra and West Bengal differ. Delhi, Haryana, Uttar Pradesh and several others charge nothing at all, and Odisha repealed its levy in April 2026.
TDS. The monthly figure from step 2b.
| Line | ₹12,00,000 CTC | ₹20,00,000 CTC |
|---|---|---|
| Gross (monthly) | 94,651 | 1,59,753 |
| Less: Employee PF | 3,000 | 3,000 |
| Less: Professional Tax | 200 | 200 |
| Less: TDS | 0 | 14,595 |
| Net pay (monthly) | 91,451 | 1,41,958 |
The ₹12,00,000 package delivers ₹10,97,312 a year in hand against a ₹12,00,000 headline — 91.4%. The ₹20,00,000 package delivers ₹17,03,396, or 85.2%. The gap widens with the package because tax is progressive while PF is capped.
The Complete Calculation, One Table
Every line from the ₹12,00,000 package, in sequence, so the whole formula sits in one place.
| Step | Line | Monthly (₹) | Annual (₹) |
|---|---|---|---|
| Input | CTC | 1,00,000 | 12,00,000 |
| 1 | Employer PF (12% on ₹25,000 ceiling) | −3,000 | −36,000 |
| 1 | Gratuity (4.81% of Basic) | −2,349 | −28,188 |
| 1 | Gross salary | 94,651 | 11,35,812 |
| 1b | Basic + DA | 48,826 | 5,85,912 |
| 1b | HRA | 24,413 | 2,92,956 |
| 1b | Other allowances | 21,412 | 2,56,944 |
| 1c | Statutory wages (Section 2(y)) | 48,827 | 5,85,924 |
| 2 | Standard deduction | — | −75,000 |
| 2 | Taxable income (new regime) | — | 10,60,812 |
| 2b | Tax after Section 87A rebate | 0 | 0 |
| 3 | Employee PF | −3,000 | −36,000 |
| 3 | Professional Tax (Karnataka) | −200 | −2,500 |
| 3 | TDS | 0 | 0 |
| 3 | Net pay | 91,451 | 10,97,312 |
Assumptions: Karnataka for Professional Tax, metro city for HRA, Basic at 50% of gross, PF on the ₹25,000 ceiling, new regime, full financial year, no variable pay. Change the state or the city and the last two lines move.
Where the Old Regime Changes the Answer
At ₹20,00,000 the two regimes produce very different taxable incomes and, counter-intuitively, the lower taxable income carries the higher tax.
| Line | New regime (₹) | Old regime (₹) |
|---|---|---|
| Gross (annual) | 19,17,036 | 19,17,036 |
| HRA exemption | Not available | −4,88,256 |
| Standard deduction | −75,000 | −50,000 |
| Professional Tax, Section 16(iii) | Not available | −2,500 |
| 80C (own PF) | Not available | −36,000 |
| Taxable income | 18,42,036 | 13,40,282 |
| Tax including cess | 1,75,140 | 2,23,164 |
| Net pay (monthly) | 1,41,958 | 1,37,956 |
The old regime strips ₹5,01,754 more out of taxable income and still costs ₹48,024 a year more in tax, because its slabs are steeper: 30% starts at ₹10,00,000 against ₹24,00,000 in the new regime. Here the old regime wins only if Chapter VI-A deductions are large — the full ₹1,50,000 under 80C, ₹50,000 under 80CCD(1B), 80D, and home loan interest — and the HRA claim is genuine and documented.
The old-regime figure above assumes rent high enough for the full HRA exemption. Lower rent, and the exemption is the third test — rent paid less 10% of Basic — which shrinks fast.
Five Places Hand Calculations Go Wrong
1. Treating CTC as gross. The gap here is ₹64,188 a year on a ₹12,00,000 package. Every subsequent line is wrong if this one is.
2. Applying the standard deduction to CTC. It applies to salary income — gross — not to the package. Using CTC overstates the deduction's effect and understates the tax.
3. Using 12% of actual Basic for PF. If Basic exceeds ₹25,000 a month and the employer applies the ceiling, PF is ₹3,000, not 12% of the real figure. At a ₹48,826 Basic the difference is ₹2,859 a month on each side. Which basis your employer uses is a policy choice — check the annexure.
4. Deducting Professional Tax from taxable income in the new regime. Section 16(iii) is an old-regime deduction. In the new regime PT still comes off your payslip but not off your taxable income.
5. Dividing annual tax by twelve when you joined mid-year. The annual liability is spread over the months remaining in the financial year. Join in October and it is six months, so each month carries roughly double.
Checking Your Own Payslip Against the Formula
Work backwards, and stop at the first line that does not reconcile.
- Gross on the payslip against your annexure. Add up the earnings side. It should equal CTC minus employer PF minus gratuity, divided by twelve.
- Basic against 50% of gross. If it is materially lower, look for the statutory wage figure — the deemed amount should have been added back for PF and gratuity.
- PF against the ceiling. ₹3,000 means ceiling basis; anything higher means actual Basic.
- Professional Tax against your state. Not your company's head office state — the state you work in.
- TDS against the annual figure ÷ months remaining. A sudden jump in January usually means an investment declaration was not backed by proof.
The in-hand salary calculator runs this same sequence and shows each intermediate line, which makes it faster to find which step disagrees with your payslip than to rebuild the arithmetic in a spreadsheet.
Frequently Asked Questions
Is there one standard salary calculation formula every company uses in India?
The three-step sequence is standard because it follows the law — CTC to gross, gross to taxable, gross to net. What varies between companies is the split inside gross: the Basic percentage, whether PF runs on actual Basic or the ₹25,000 ceiling, and whether gratuity is shown inside CTC at all. Those choices change the output while leaving the formula itself unchanged.
Why does my hand calculation not match my payslip?
In order of likelihood: you used CTC where gross belongs, your employer applies the PF ceiling and you applied 12% of actual Basic, your Professional Tax is your work state's rather than the one you assumed, or your TDS is spread over fewer months than twelve. Reconcile line by line from gross downwards and the first mismatch identifies the cause.
Does the salary calculation formula change under the new Labour Codes?
The arithmetic does not. What changed is the base it runs on. Section 2(y) of the Code on Wages defines wages uniformly and adds the 50% floor, so a low Basic no longer shrinks the PF and gratuity base — the shortfall is deemed back up. Structures built before the codes may show a statutory wage figure that differs from their stated Basic.
Is gratuity added before or after gross salary in the formula?
Before. Gratuity accrual is part of CTC and is subtracted to arrive at gross. It never appears on a monthly payslip and it is not part of gross, net or taxable income. It becomes payable only on exit, subject to the eligibility conditions.
Do I subtract Professional Tax before or after calculating income tax?
Both, in different places, and only in the old regime. Under Section 16(iii) it reduces taxable income before tax is computed. It is also deducted from gross on the payslip to arrive at net. In the new regime only the second applies — PT still comes off your salary but gives no tax relief.
Is the standard deduction applied to gross salary or to CTC?
To gross. It is a deduction from salary income, and salary income is what is paid to you — not the employer's total cost. Applying it to CTC inflates the relief by the employer PF and gratuity amounts and produces a tax figure that is too low.
How is monthly TDS worked out from an annual tax figure?
The employer estimates your annual liability at the start of the year and divides it by the months remaining in that financial year. Declared investments reduce the estimate from the outset; if proof is not submitted by the cut-off, the estimate is revised upward and the shortfall is recovered across whatever months are left, which is why deductions often spike in the last quarter.
Should DA be included in the basic salary figure in the formula?
Yes. PF, gratuity and the Section 2(y) wage definition all run on Basic plus dearness allowance together. Most private-sector structures fold DA into Basic and show a single line, but where they are shown separately both must be added before applying the 12% and 4.81% rates.
Does the formula change if my company pays a variable bonus?
The formula holds, but variable pay sits outside the monthly cycle. It is part of CTC and part of taxable income, and it is taxed when paid. Because it is not spread across twelve months it does not raise your regular net pay, which is why two packages with identical CTC can pay very different amounts each month.
Can the same CTC produce two different net salaries?
Routinely. The Basic percentage, the PF basis, the variable share, your work state and your tax regime each move the result independently. Two ₹12,00,000 offers can differ by several thousand rupees a month without either being wrong — which is why two offers are only comparable once both structures are on the table.
Calculators
- In-hand salary calculator — runs this whole sequence and shows every intermediate line
- Salary breakup calculator — the component split and the statutory wage figure
- HRA calculator · PF / EPF calculator
- Income tax calculator · Gratuity calculator
Sources, Legal References and Disclaimer
Primary provisions: Section 2(y), Code on Wages, 2019 (definition of wages and the 50% floor); Section 16(ia) and Section 16(iii), Income-tax Act (standard deduction and Professional Tax); Section 10(13A) read with Rule 2A (HRA exemption); Section 87A (rebate); Section 192 (deduction of tax at source on salary); Section 53, Code on Social Security, 2020 (gratuity); Employees' Provident Funds and Miscellaneous Provisions Act (wage ceiling for contributions).
Official sources: Income Tax Department for slabs, rebate limits and Form 26AS · Employees' Provident Fund Organisation for contribution rates and the wage ceiling · Ministry of Labour and Employment for the labour codes · Central Board of Direct Taxes for the Income-tax Rules.
Figures are computed for FY 2026-27 on the assumptions stated with each table. Professional Tax is a state levy and differs by state; HRA exemption depends on rent actually paid and on the city; the Basic percentage and the PF basis are employer policy. This is general guidance, not tax advice — your final liability is settled in your return and will differ from monthly TDS.