Understanding the Difference: Gross Earnings vs. Net Earnings
Meaning of Gross Income:
Gross Earnings vs. Net Earnings is the aggregate earnings of an individual before taxes; this includes salary, interest, commission, rent, profit, dividends, and capital gains.
For a company, it refers to the gross profit generated by a business from the sale of goods or services. When a firm’s gross profit is calculated, all non-operating expenses are excluded. Only production-linked expenses are taken into consideration.
Gross earnings are an important metric in financial analysis. It is used for analyzing a firm’s financial condition, operational efficiency, and profitability. Gross earnings assure lenders and landlords that the borrower can repay the credit.
Formula:
Gross Income = Salary + Rent + Interest on Other Income
Meaning of Gross Income
Net income is different than other forms of profit because the former accounts for all money flowing in and out of the company, while profit usually only accounts for one type of expense.
For instance, gross profit refers to revenue minus the cost of goods sold, while operating profit refers to revenue minus operating costs.
Net income, on the other hand, takes all expenses into account and thus is regarded as a very holistic and useful way to see how a company’s total profit, especially over time.
Formula:
Net Income = Total Revenue – Total Expenses
Net Income = Total Revenue – (Taxes + Operating Cost – Depreciation + Other Expenses)
Gross Earnings vs. Net Earnings
Both annual Gross Earnings vs. Net Earnings play important roles in their own right. However, it is important to understand the differences in their fundamentals and implications. Let us understand the differences through the comparison below.
Net income represents the profit left after reducing the indirect expenses such as salary, rent, interest, and rent.
Gross Earnings = Revenue – COGS.
Whereas, Net Income = Gross Earnings – Expenses.
The former represents the income earned from the main business. Whereas the latter reflects the net profit of the company after reducing all expenses. Thus, net income is not limited to direct expenses.
Income statements show revenue and cost of goods sold, followed by gross earnings. Net income is revealed after other expenses and is a bottom-line item in the balance sheet.
If a company’s net income is less than the gross income, the company needs to cut other expenses (indirect costs). The net income recognizes other incomes, like interest income and dividend income. This is unlike gross earnings
How to Calculate Gross Income?
To calculate the annual gross income, it is important to determine the basic factors such as the basic income streams and expenses, after which, the methods explained below can be used to calculate using the formula.
For Individuals:
The gross earnings can be evaluated by aggregating the following components:
- Salary or Wages: It is the total pay offered by an employer to an individual. If such compensation is allowed hourly or daily, it is termed as wages.
- Rent: Gross earnings also include rental earnings from residential or commercial properties
- Dividends: The dividends on preference shares and bonds are also considered as income.
- Interest: The interest received on deposits and loans are considered a part of gross earnings.
- Capital Gain or Loss: The profit or loss made by an individual on the sale of capital assets or property comes under gross earnings. This includes houses, land, buildings, and valuables.
- Income from Other Sources: All other means of earnings also come under gross earnings. These include pensions, alimony, prizes, lotteries, and gifts.
For Companies:
The gross profit of companies can be calculated by reducing the cost of goods sold from the entity’s revenue.
- Revenue: It is the total sales proceeds that a company generates in a given period.
- Cost of Goods Sold: COGS refers to the direct cost incurred for the production of goods. It includes the cost of materials, labor, packaging, and freight.
Both these components are found on a firm’s income statement. All the non-operating expenses are excluded, and only production-linked expenses are considered during computation. Non-operating expenses are expenses that are not related to the principal activities of a business. They are usually stated on the company’s income statement.
How To Calculate Net Income?
Net income is a powerful business tool that can help you in many ways. It allows you to compare the hot dogs you sell with buns to the hot dogs you sell. If you are trying to make a profit, you should be knowledgeable in this subject. Here are the basics of calculating net income:
1. Add up all of your income for the month
2. Subtract all of your expenses for the month
3. Subtract taxes
4. Divide your result by the number of months that you have been in business
5. Add any miscellaneous income that you have had
6. Using a computer, you can type your figures into an appropriate program
For Business:
Net income is the amount of income a business earns after expenses have been deducted. Net income is often called the bottom line. This is what is left over once all expenses are paid. The expenses are subtracted from the income to arrive at net income for the year. The net income can be represented as a positive or negative number.
The positive would be after all expenses were paid. The negative would be if expenses were greater than income.
Featured Investing & Tax Products of May 2023
Tax-saving investment options
Equity-linked Savings Scheme (ELSS)
ELSS mutual funds are one of the common investment options used under Section 80C to save income tax. The maximum deduction that can be claimed is of Rs 1.5 lakh. ELSS mutual funds invest in equity and the returns earned are market-linked, making them one of the riskiest investment options in the 80C basket.
Section 80C allows an individual to claim a maximum deduction of Rs 1.5 lakh from their taxable income. By claiming this deduction, an individual’s taxable income reduces which leads to a reduction in income tax liability. An individual whose total income is taxed at 30% tax rate and 4% cess, will pay Rs 46,200 as additional tax if the maximum deduction is not claimed. Had the maximum deduction being claimed, then tax outgo will reduce by Rs 46,200
Here are some of the common options available under Section 80C, 80CCC and 80CCD (1) for saving income tax.
Public Provident Fund (PPF)
PPF is one of the most popular small savings schemes. This is because PPF has EEE tax status. This means that investment made in PPF is exempted from tax, the interest earned from PPF is exempted from tax, and the maturity amount is also exempted from tax.
PPF comes with a lock-in period of 15 years, where the lock-in period starts after the completion financial year in which the initial investment is made.
National Pension System (NPS)
The investment made in NPS is eligible for deduction under Section 80CCD (1) of the Income-tax Act. The scheme offers a pension to the investor from his/her retirement age. The returns under the NPS are market-linked.
The amount of deduction that can be claimed for NPS investment under Section 80CCD (1) is 10% of salary (basic salary plus dearness allowance). The maximum deduction that can be claimed is of Rs 1.5 lakh. Hence, an individual having.
Employees Provident Fund (EPF)
EPF is one of the most popular tax-saving instruments for salaried individuals. If the organization is covered under the EPF law, then a salaried individual will be making a contribution to the EPF account. An individual is required to contribute 12% of basic salary to the EPF account and the employer will make a matching contribution as well.
Tax-saving fixed deposits
A 5-year tax-saving fixed deposit is another option available to individuals to save income tax in the current financial year. An individual can invest in tax-saving fixed deposits at a bank or a post office. The interest rate on tax-saving fixed deposits varies between banks. For post office tax saving fixed deposits, the interest rate is announced by the government. The interest received from tax-saving fixed deposit is taxable in the hands of the investment
National Savings Certificate (NSC)
An individual can invest in NSC as well to save income tax. The investment in NSC can be made by visiting the nearest post office. The interest rate on the NSC is announced by the government every quarter. However, once the investment is done, the interest rate remains fixed till maturity. Currently, NSC is offering interest rate of 7% per annum.
NSC has a lock-in of 5 years. Thus, once an individual makes an investment, the money cannot be withdrawn before the completion of 5 years.
Sukanya Samriddhi Yojana (SSY)
This a savings scheme for the girl child. A parent of a girl child can invest in Sukanya Samriddhi Yojana and save tax on it. Every quarter, the government announces the interest rate for Sukanya Samriddhi Yojana. Currently, the scheme is offering an interest rate of 7.6%.
An individual can open the Sukanya Samriddhi account either via bank or post office. The Sukanya Samriddhi account will mature after 21 years of opening of the account. How.
Senior Citizens Savings Scheme (SCSS)
Only senior citizens can invest in this scheme to save on income tax. The interest rate on Senior Citizens Savings Scheme is announced by the government every quarter. Currently, the scheme is offering an interest rate 8%. Once the investment is done, the interest rate remains fixed for the tenure of the scheme. The interest is paid every quarter to the senior citizen.
The scheme has a lock-in period of 5 years. However, the scheme.
Unit-linked insurance plans (ULIP)
An individual can make an investment in ULIP to save tax. It is an insurance product that offers both life insurance coverage and the benefit of investing equity. The returns earned from ULIP products are market-linked.
The ULIP has a lock-in period of 5 years. Once the lock-in period expires, the individual can withdraw the money.
How Both Can Impact Your Taxes and Investments:
Your gross and net income can impact your taxes and other financial decisions like your investments. When preparing your taxes, you’ll be calculating your net income, so it’s important to be aware of deductions you might be eligible for, such as travel and office costs.
Understanding both your gross income and your net income can also help you determine where and how to invest your money, such as estate planning and 401(k) investments. For instance, it might be more beneficial for you to put pre-tax money in a company 401(k) than contribute after-tax money to an IRA. Whether you are a business owner or an individual contributor, financial literacy is important for establishing a budget and an investment plan. Understanding key terms and how they impact your wallet helps ensure that you’re making the most of your hard-earned money.
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FAQs
Gross Income = Salary + Rent + Interest on Other Income
Net income (NI) is calculated as revenues minus expenses, interest, and taxes.
The net income is very important in that it is a central line item to all three financial statements. While it is arrived at through the income statement, the net profit is also used in both the balance sheet and the cash flow statement.
A specific item, esp., an amount listed separately, in a budget, appropriation bill, etc.
Net Income = Total Revenues – Total Expenses
Net income, also known as net profit, is a single number, representing a specific type of profit. Net income is the renowned bottom line on a financial statement.
The total amount of income you receive from all sources each month. It includes salary, bonuses,
overtime, investment income, interests, Social Security, and any other income sources.
Gross income includes the following:
· Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items.
· Gross income derived from the conduct of trade or business or the exercise of the profession.
· Gains derived from dealings in property.
