What is Gross Income?

A Gross income is a total income that an employee or person received from an organization and company.  Gross income includes all the taxes and other deductions. 

 

For example, if your monthly income is Rs 10,000/- and you receive Rs 8,000/- after a month, then the difference between these incomes is the deduction or other taxes (Rs 2,000) which are levied on your salary. 

 

In this scenario, Your monthly income ( Rs 10,000) is your Gross income and the actual salary you receive (Rs 8,000) is your Net income. 

 

We can understand Gross Income by this formula:-

 

Gross Income = Net Income( Your Receiving ) + Deductions (Taxes etc)

Company’s Gross income 

Gross income with respect to a company is quite different from an individual income. In contrast to a company, a Gross income is actually termed as gross profit which a company receives after  all the expenses a company made during their financial tenure or period which is usually a year or annually.

 

Company expenses are actually the cost of goods or services a company spend within the process of making a gross profit or income. 

 

So, the Gross income of a company stands with the following:-

 

Gross Income = Gross Revenue – Cost of Goods or Services Sold

 

In this Formula, Gross Revenue is the total income which a company receives during their financial period before the cost of goods or services purchased.

Adjusted Gross Income

The more accurate version of the Gross Income is Adjusted Gross Income. It is very important to know how you can adjust your Gross Income as it reflects how much income tax you will pay. You can identify your adjusted gross income by filing your income tax return. For this, you should seek help from a  tax software or the report of the submission of the returnsturn.

 

Some of the examples which could reflect or adjust your Gross income are:-

 

  • Moving Expenses

These are the expenses you can claim to the government when you move to a   because of your work.

  • Alimony

This is the amount you paid to your spouse after the divorce or separation. You can also claim for this amount.

  • Educator Expenses 

If you are a qualified educator and paid some amount of money for your trade or business expenses, you can claim for a certain amount of money when filing your annual tax return.

 

  • Student Loan Interest

If you take a Student Loan then you will definitely have to pay some interest on a student loan which is based on the size and term of the student loan you had taken. You can also claim this interest.

 

  • IRA Contributions

If you have made a contribution to an IRA or Individual Retirement Account, then you don’t need to pay tax on the amount of interest you receive from the IRA’s until you withdraw the money.

 

  • Health Insurance Deductions

You can claim a certain amount of deduction from your health insurance premiums. The premium should be of your own, your spouse or your dependent children.    

Some Major deductions on Gross Income  

  • Central or State Income taxes which vary depending on your gross income size.
  • Payroll Taxes are a fixed percentage of your gross income.
  • Local Taxes depending on where you live.

Other deductions

If you are taking some benefits or facility through your employer, then your employer will deduct this amount from your gross income.

 

For example; If you have taken a cab service from your employer for your daily up-down from your house and your office or you have taken a health insurance plan through your employee, then the amount of those facilities will be levied on your gross income. 

 

Monthly gross income

If you are paid annually, then your Monthly Gross Income will simply be calculated as follows:-

 

Monthly Gross Income = Annual Gross Income/12 

Importance of Gross income

  • It is used by Lenders as a tool to identify how much they can allow you to borrow their financial products such as mortgages.

 

  • Used by Banks to decide how much loan they can give you.

 

  • If you are applying for a credit facility then approval will depend upon your gross income which should not exceed a certain amount.

 

  • The gross income concept gives us a clear understanding of our budgetary need and hence make a financial plan according to this.

 

For example, our monthly spending should not exceed our net income.