How to calculate salary: gross pay, deductions & net pay explained
A clear, step-by-step guide to calculating employee salary in India — from gross pay and allowances to deductions and take-home net pay.
If you run payroll, one question comes up every single month: how much does each employee actually take home? Getting salary calculation right keeps your team happy and your business compliant. This guide breaks it down step by step.
The three numbers that matter
Every payslip comes down to three figures:
- Gross salary — total earnings before any deductions.
- Deductions — statutory and voluntary amounts taken out (PF, ESI, professional tax, TDS, advances).
- Net salary (take-home) — what actually reaches the employee’s bank account.
The formula is simple:
Net Salary = Gross Salary − Total Deductions
The work is in getting each piece right.
Step 1: Add up gross salary
Gross salary is the sum of all earnings for the month:
- Basic pay — usually 40–50% of gross.
- House Rent Allowance (HRA) — often 40–50% of basic.
- Special / other allowances — conveyance, medical, and so on.
- Overtime and bonuses — variable, based on attendance and performance.
Add these together and you have gross pay for the month.
Step 2: Adjust for attendance
Salary is earned for days worked. If an employee was absent without paid leave, their pay is prorated:
Payable = (Gross ÷ Total days in month) × Days paid
This is exactly where attendance accuracy matters — a wrong attendance figure means a wrong salary. Biometric attendance that flows straight into payroll removes this guesswork.
Step 3: Apply deductions
The most common statutory deductions in India are:
- Provident Fund (PF) — 12% of basic (employee share), matched by the employer.
- ESI — 0.75% of gross (employee share), for eligible employees under the wage threshold.
- Professional Tax (PT) — a small state-specific amount.
- TDS — income tax deducted at source, based on the employee’s tax slab.
Add any voluntary deductions (salary advances, loan EMIs) to get total deductions.
Step 4: Arrive at net pay
Subtract total deductions from the attendance-adjusted gross, and you have take-home pay. Generate a payslip that shows each line item clearly — employees should always be able to see how their number was built.
Let software do the maths
Doing this by hand for one employee is easy. Doing it for twenty, every month, with changing attendance and statutory rules, is where mistakes creep in. Staff Payroll calculates gross, applies attendance, runs every deduction, and produces payslips automatically — so payday is accurate and takes minutes, not days.