Salary & compensation · Updated October 2026
A salary gross-up is when the employer agrees to bear the employee’s tax on a payment, so it works backwards from the net amount promised to a larger gross figure that leaves exactly that net after TDS. The catch is that tax paid by the employer is itself taxable income, so you end up paying tax on the tax.
Suppose a joining bonus is promised as Rs 1,00,000 “in hand” to someone already in the 30 percent slab. With 4 percent health and education cess, the marginal rate is 31.2 percent. A first guess adds Rs 31,200 of tax, but that Rs 31,200 is extra income, which attracts Rs 9,734, which attracts Rs 3,037, and so on. The series settles at the closed-form answer:
The formula only holds while the whole amount sits in one slab. If the grossed-up figure pushes income across a slab or a surcharge threshold, payroll software iterates: compute tax, add it, recompute, and stop once the change is under a rupee. Spreadsheets built on a flat rate are the usual source of shortfalls.
Tax the employer pays on an employee’s cash salary is a perquisite, because it settles an obligation the employee would otherwise have paid: Section 17(2)(iv) of the 1961 Act for FY 2025-26, and Section 17(1)(f) of the Income-tax Act, 2025 from tax year 2026-27. Non-cash benefits are treated differently. The employer may choose to pay the tax on a non-monetary perquisite (Section 192(1A), now Section 392(2)), and that tax is exempt in the employee’s hands under Section 10(10CC), carried into Schedule III, entry 10 of the 2025 Act. So no gross-up is needed there. Expatriates on “tax-protected” packages sit in the grey zone between the two, and tribunals have differed on whether tax-on-tax for them is exempt; take advice before relying on either view.
Yes, and by more than the headline tax. In the example above the payment costs Rs 1,45,349 against a promised Rs 1,00,000, and that larger figure is what should appear in CTC and the budget.
The employee’s chosen regime for that year, since TDS under Section 192 follows the regime declared to the employer. A gross-up done at old-regime rates for a new-regime employee will over-pay.
It shows up mainly in expat assignments, sign-on bonuses for senior hires, and settlement amounts agreed “net of tax”. For routine monthly pay, Indian offers are almost always quoted gross.
To test a gross figure before you commit to it, run it through the income tax calculator and check that the net matches the promise; perquisite valuation covers how the non-cash side is priced.