Net Salary vs Gross Salary: Differences & How to Calculate

Net salary and gross salary are common topics among employees, and the discussion never seems to end.

Even though the explanations are available, many employers still confuse how to pay their employees whether using net or gross salary.

In this article, we will explain what gross and net salary mean, their differences, and when businesses should use each type. Keep reading to learn more.

What is Gross Salary?

Gross salary is the total amount an employee earns before any deductions.

This is the figure stated in job offers and employment contracts.

However, the actual take-home pay (net salary) will be lower because of mandatory deductions.

Components of Gross Salary

Gross salary consists of several elements, including:

Basic salary: The fixed amount paid to employees before any bonuses or extra allowances.
Fixed allowances: Employers may offer allowances for housing, transport, meals, or other benefits.
Overtime Pay: If an employee works extra hours, they may receive additional wages based on their hourly rate.
Bonuses and Incentives: Some companies provide performance-based bonuses, commissions, or annual incentives.

Employers determine gross salary based on industry standards, company budget, and employee experience.

While offering a high gross salary may attract candidates, businesses must also consider the impact of deductions on take-home pay.

What is Net Salary?

Net salary is the actual amount employees receive after all deductions are made from their gross salary.

This is also called take-home pay because it reflects the amount deposited into the employee’s bank account.

Components of Net Salary

It consists of the following components:

Gross Salary – Total earnings before deductions (Basic Salary + Allowances + Bonuses).
Deductions – Includes:
- Taxes (Income tax, social security contributions)
- Employee Benefits (Health insurance, retirement contributions)
- Other Deductions (Loan repayments, union fees)

What Gets Deducted from Gross Salary?

Several deductions reduce the gross salary before an employee receives their net salary:

Statutory deductions in Malaysia:

Employees Provident Fund (EPF/KWSP): Employees contribute 9% to 11% of their salary to their EPF savings for retirement.
Social Security Organization (SOCSO/PERKESO): Provides coverage for workplace injuries and disabilities, with deductions ranging from 0.5% to 1.75%.
Employment Insurance System (EIS): Offers financial support to employees in case of job loss, with a contribution of 0.2%.
Monthly Tax Deduction (MTD/PCB): A portion of the employee’s salary is deducted for income tax, depending on their tax bracket.

Additional deductions:

Loan repayments if the employee has agreed to deductions.
Insurance contributions or cooperative society payments.
Zakat deductions for Muslim employees who opt for automatic zakat payments.

Employees often look at gross salary when considering job offers, but what truly matters to them is net salary, which is the amount they can spend each month.

Key Differences Between Net Salary and Gross Salary

We already do a recap for differences between net and gross salary in a form of table below:

Category	Gross Salary	Net Salary
Definition	Total earnings before any deductions	Take-home pay after deductions
Includes	Basic salary, allowances, overtime, bonuses	Gross salary minus EPF, SOCSO, EIS, PCB, and other deductions
Amount	Higher than net salary	Lower than gross salary
Importance	Used for salary negotiations, loan applications, and tax brackets	Determines actual spending power

Why Should Employers Focus on Net Salary?

Employers must be transparent when presenting salary offers.

If an employee sees a high gross salary but receives a lower-than-expected net salary, they may feel betrayed. This can affect job satisfaction and retention.

To avoid confusion, employers should:

Clearly state both gross and net salary in job offers.
Break down deductions during salary discussions.
Offer benefits that increase take-home pay without raising costs.

How to Calculate Net Salary from Gross Salary in Malaysia

Employers need to know how to calculate net salary accurately to manage payroll and avoid confusion among employees.

Here’s a simple breakdown of how net salary is calculated:

Step-by-Step Calculation

Start with defining the gross salary. This is the total salary stated in the employment contract before any deductions.
Deduct Employees Provident Fund (EPF) around 9% to 11%.
Deduct Social Security Contributions (SOCSO & EIS). SOCSO range from 0.5% to 1.75% depending on the employee’s salary and age, while EIS is fixed at 0.2% of the gross salary.
Deduct Monthly Tax Deduction (PCB/MTD) based on the employee’s tax bracket and is automatically deducted from their salary for income tax payments.
Subtract additional agreed-upon deductions, such as loan repayments, insurance, cooperative society contributions, or zakat, are deducted based on employee consent.

Example Calculation for RM5,000 Gross Salary

Category	Amount (RM)
Gross Salary	5,000
EPF (9%)	-450
SOCSO	-70
EIS	-10
PCB (Income Tax)	-200
Net Salary (Take-home Pay)	4,270

The final net salary, RM4,270, is what the employee will receive after deductions.

Employers can also use payroll software or salary calculators like LHDN PCB Calculator to automate these calculations and maintain payroll accuracy.

How to Determine Business Use Net or Gross Salary (in Table)

Employers must decide whether to offer salaries in gross or net terms based on their business model and industry. Here’s a comparison:

Scenario	Use Gross Salary	Use Net Salary
Standard payroll processing	Yes	No
Clear understanding of salary structure	Yes	No
Attracting employees with higher take-home pay	No	Yes
Employees are responsible for their own tax contributions	Yes	No

Most businesses use gross salary for payroll to follow Malaysian regulations.

However, certain industries, like contract-based jobs, may discuss net salary to highlight take-home earnings.

FAQ

Why is employee's net salary lower than my gross salary?

Net salary is lower because statutory deductions, taxes, and contributions are taken out before payment. This ensures employees contribute to retirement savings, social security, and tax obligations.

How do I calculate employee's net salary in Malaysia?

Net salary is calculated by deducting EPF, SOCSO, EIS, PCB, and other agreed-upon deductions from gross salary.

What deductions affect employee's take-home pay?

The biggest deductions are EPF (9-11%), SOCSO (0.5-1.75%), EIS (0.2%), and PCB (income tax based on salary).

Can employer deduct additional amounts from employee's salary?

Yes, but only if the deductions comply with Malaysia’s Employment Act 1955. Some deductions require employee consent or approval from the Director General of Labour.

How do I check if employee's salary deductions are correct?

Employees can use online salary calculators like:

LHDN PCB calculator (for tax deductions)
PayrollPanda, BrioHR, Talenox Malaysia, and Fincrew (for full salary breakdowns)

Employees rely on their salary to manage their expenses and plan for the future. While gross salary may look appealing, it is the net salary that truly matters in their daily lives.

Employers who help employees understand deductions and benefits create a more engaged and financially secure workforce.

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