Gross to net pay in India: how it works
Reviewed by Mellow Editorial Team, HR & payroll content team
Gross-to-net pay in India is the process of starting with an employee's agreed salary, applying all statutory deductions — provident fund, ESI, income tax, and others — and arriving at the amount you actually transfer to their bank account. Getting each step right matters: errors create compliance exposure and erode employee trust.
What "gross salary" actually means
Gross salary is the total cost of an employee's compensation before any deductions. It typically includes basic pay, house rent allowance (HRA), special allowance, and any other components your offer letter specifies.
The structure of these components is not arbitrary. The split between basic and allowances affects PF calculations, gratuity liability, and tax treatment. A higher basic, for example, increases both the employee's and employer's PF contribution and builds a larger gratuity obligation over time. Many employers are revisiting these structures in 2026/27 as the four consolidated Labour Codes come into effect, since the Codes redefine "wages" in a way that narrows how much of total pay can sit outside the basic wage component.
Statutory deductions: what you must withhold
Once you have the gross salary, you apply deductions in a defined order. The main ones are:
Provident Fund (EPF)
Both the employee and employer contribute 12% of basic wages (plus dearness allowance, if any) to the Employees' Provident Fund. The employee's 12% is deducted from their gross pay. The employer's 12% is an additional cost on top of the salary — it does not reduce the employee's take-home, but it does increase your total employment cost. EPF applies to establishments with 20 or more employees, and once a business is covered, it generally stays covered.
Employees' State Insurance (ESI)
ESI applies to employees whose monthly wages fall below the current statutory threshold. Both employer and employee contribute. If an employee's wages exceed the threshold, ESI does not apply to them. Check the current ceiling with ESIC directly, since it is revised periodically.
Professional Tax
This is a state-level tax, so the rates and slabs vary by state. Not all states levy it. Where it applies, you deduct it from the employee's salary each month and remit it to the state government. The maximum professional tax across any state in India is capped under the Constitution.
Income tax: the TDS calculation
Income tax deduction at source (TDS) is usually the most complex part of the gross-to-net calculation, particularly for mid- and senior-level employees.
At the start of each financial year, you collect investment declarations from employees. Based on those declarations — and whether the employee opts into the new or old tax regime — you estimate their annual tax liability and divide it equally across the months remaining in the year. This monthly amount is what you deduct as TDS.
Under the new regime (the default from 2023/24 onwards), tax slabs rise progressively to 30% at higher income levels. A section 87A rebate reduces tax liability for employees with lower net taxable income, effectively making their liability nil. A 4% health and education cess applies on the income tax computed, across all employees. The old regime allows various exemptions and deductions, including HRA, section 80C, and others, but employees must actively choose it each year.
You reconcile the actual deductions at year-end. If an employee's actual investments differ from their declaration, you adjust TDS in the final months — often January to March. You then issue Form 16 to every employee by the due date after the financial year closes, and file Form 24Q with the Income Tax Department every quarter.
Arriving at net pay
After all deductions, the calculation looks like this in broad terms:
Gross salary
minus employee EPF contribution (12% of applicable wages)
minus ESI employee contribution (if applicable)
minus professional tax (if applicable in your state)
minus income tax TDS for the month
equals net pay
The employer's EPF and ESI contributions sit outside this calculation — they are your cost, not a deduction from the employee's salary.
One practical point: always reconcile your payroll register against your bank transfer file before you pay. Amounts in the payroll system and the actual bank instruction should match to the rupee. Discrepancies are far easier to resolve before money moves.
Compliance obligations that run alongside payroll
Running gross-to-net is not a one-time event each month. It comes with recurring filings. EPF contributions must be deposited by the 15th of the following month. ESI contributions have their own deposit deadline. TDS must be deposited within the prescribed time after deduction. Form 24Q is filed quarterly.
Gratuity sits slightly apart — it is not a monthly deduction from salary, but it is a liability you accrue over time. An employee who completes five continuous years of service becomes eligible, and the amount is calculated based on their last drawn salary and years of service. Some employers fund this liability annually through a group gratuity scheme; others provision for it internally.
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