If you have just started working and are confused as to how much exactly you will earn at the end of the month, don’t worry. We’ll explain all that there is to know about CTC and the maths of salary packages in this article.
What Is CTC?
CTC stands for “Cost to Company”, which, in accounting and finance, means the total cost that a company incurs on hiring an employee. It is the amount that each company spends on its employees from the company’s point of view.
CTC is cumulative of several smaller amounts. Some make up the salary that an employee receives in their account, while others are intangible expenses that a company spends on its employees.
CTC = Basic Salary + Dearness Allowance + House Rent Allowance + Conveyance Allowance + Medical Allowance + Special Allowance + Employer’s Contribution to Provident Fund + Employee’s Contribution to Provident Fund + Employer’s Contribution to Employee State Insurance + Performance Bonus + Other Allowances + Gratuity
The components of CTC have been explained in detail later.
What Is Gross Salary?
Gross salary is often confused with CTC. However, there’s a difference between the two.
Gross salary is the amount that is payable to the employee before the deduction of taxes and after the deduction of the Employee Provident Fund (EPF) contribution and gratuity subtracted from the CTC.
Direct and indirect benefits, overtime salary, and other differentials are included in gross salary.
Gross Salary = CTC – Employer’s Contribution to Provident Fund – Employer’s Contribution to Employee State Insurance
What Is Net Salary? How Do They Differ From Gross Salary and CTC?
Net salary is the salary that an employee receives in-hand or in their bank account after the tax deduction.
Net Salary = CTC – Employee’s Provident Fund Contribution – Gratuity – Income Tax (TDS) – Other deductions if any such as Insurance premium, Loan repayment or any other authorized deductions
So, the difference between CTC and in-hand salary lies in the PF contribution, gratuity, and income tax deductions.
What Is The Difference Between Gross Salary And CTC?
Cost To Company, commonly referred to as CTC, is the total cost companies spend for hiring and retaining employees.CTC includes your salaryalong with all the other benefits the employer pays, including EPF, HRA, medical insurance, and other allowances. CTC may also include cab service, subsidized loans, food coupons, and much more.
So, CTC is the total expense of your employer for sustaining your services. The amount varies among companies, based on the number of benefits. Moreover, your take-home salary depends on the CTC.
On the other hand, the gross salary is the amount that remains after subtracting gratuity and EPF from the CTC. The gross salary is always higher than your take-home salary as the amount is calculated before deductions such as EPF contribution, taxes, and others.
It includes holiday bonuses, overtime pay, and any other additional amount offered by the employer.
To determine your gross salary, you lmust know the gratuity and EPF amounts.
- Gratuity: Section 10 (10) of the Income Tax Act, 1961 mandates that an employee is entitled to receive a gratuity if he or she completes at least five years in a company. Your employer will pay the gratuity amount at the end of your employment tenure. Apart from retirement, you will get the gratuity amount when leaving the company to seek employment elsewhere.
- EPF: The Ministry of Labor mandates this benefit. You must contribute a minimum of 12% of your salary to the EPF. Your employer also contributes the same amount to the EPF account. You may withdraw the entire accumulated amount at the time of retirement.
How to Calculate CTC, Gross and Net Salary?
Calculating CTC, gross and net salary is pretty simple if you have identified all the components correctly and accurately.
We’ll suppose that Disha has applied to Firm X for a job and received a pay package, of which the details are given below:
|Amount (Annual, INR)
|House Rent Allowance
|Leave and Travel Allowance
|Provident Fund Contribution
Now, Disha’s CTC is the total of all the direct benefits listed, which amounts to INR 7,00,000. Reduce that amount by the gratuity and PF contribution to arrive at the gross salary.
So, as per the gross salary formula:
Gross Salary = 7,00,000 – (84,000 + 29,629) = INR 5,86,371
Now, subtract from this value, the total income tax, which is calculated at 5% from INR 2.5 lac to 5 lac and 10% from INR 5 lac to 7.5 lac.
Net Salary = 5,86,371 – 33637 = INR 5,52,734
What Are the CTC Benefits and Allowances in India?
Direct benefits include the amount that is explicitly paid by the employer to the employee. They include:
1. Basic Salary
The basic salary is an amount that makes the core of an employee’s salary. It constitutes a major chunk of the salary that an employee receives, sometimes more than 45% of the total amount.
2. Dearness Allowance
Inflation is the phenomenon that causes the price of general goods to rise by a certain amount every year. If the general price increases, so should an employee’s salary if they are to survive comfortably.
Hence, employers provide a dearness allowance – a basic cost of living adjustment that alleviates the pinch of inflationary pressure one might feel in their pockets.
3. Conveyance Allowance
Employees have to travel to and from their residences to their workplace each day, and over the course of a year, the cost incurred for this commute racks up to a large amount.
Therefore, most employers include a conveyance allowance to reimburse the cost that an employee incurs on their commute. It generally makes up a small percentage of the total salary.
This allowance is provided only in cases where the employer does not provide a means of transportation to the employee.
4. House Rent Allowance (HRA)
HRA, comprising roughly 10-15% of the total in-hand salary, is an amount paid by the company to reimburse the employee if they are living in a rented space. This allowance usually entails certain tax benefits too.
HRA is a part of an employee’s salary, irrespective of their rent status. In case you are actually paying rent, you can claim the amount later, which is tax-free.
But if not, the HRA becomes just another part of your salary. You can spend this amount as you please, but the amount is fully taxable.
5. Medical Allowance
Medical allowance, like HRA, is an amount paid by the employer to the employee every month, irrespective of their health status. The employee can use this amount as they please.
Thinking that medical allowance is the same as medical reimbursement is a common misconception. These terms are often used interchangeably, but they imply two very different types of payments.
While medical allowance is paid by the employee every month as a part of one’s salary, medical reimbursement is used to refer to the amount that is paid by the employee against the submission of relevant bills. This is a “reimbursement”, and, therefore, warrants proofs of payment.
Other than that, under the Income-tax Act, 1961, medical allowance is a non-exempted payment, making it fully taxable. On the flipside, medical reimbursement falls under the ambit of Section 80D, and an amount up to INR 15,000 is tax-free.
The second component, indirect benefits, comprises payments made by the employer on behalf of the employee.
1. Health Care Costs
Formal salaried employees are more often than not provided health care benefits, which include health insurance. Sometimes, this insurance covers the employee as well as their family members.
2. Taxis/Buses for Commute
Although we’ve already listed conveyance allowance as a part of direct benefits, that amount is only paid when there’s no conveyance provided by the employer. The other side of that is employers shelling out money on their own to charter buses or taxis for their employees.
3. Low-Interest Loans
Bank employees are allowed loans at a special, subsidised rate.
4. Meals and Snacks
Modern office spaces are equipped with meal and snack outlets for the employees to enjoy. This perk is paid for by the company on the employee’s behalf.
5. Office Space Rent
Some companies attribute a certain amount of rent to the space that a particular employee is using in the office. This is termed office space rent.
For instance, if the firm spends INR 1,00,000 on rent each month, and there are 20 cubicles in the office, the office space rent for each employee turns out to be INR 5,000.
6. Company Leased Accommodation
Many firms offer to find and pay for the residence an employee might take, especially if they are relocating for the job. This is called Company Leased Accommodation, and the rent for that place is paid for by the firm.
1. Gratuity Amount
Gratuity is paid at 4.81% per annum as per Indian statutes. Withdrawal is prohibited before 5 years, and if an employee leaves the firm before completing 5 years, they lose their accumulated gratuity.
2. Employer Provident Fund Contribution
12% of the basic salary of an employee goes towards their PF account directly from the employer.
A pre-defined amount is contributed by the employer to an account in the employee’s name. This can be withdrawn at the time of retirement.
Net salary is the amount that an employee receives at the end of the month, and it can vary a great deal from the initial CTC because of a lot of elements.
CTC includes within its purview both explicit and implicit costs that a firm incurs on a worker, some of which might not be directly paid to the worker, but they do benefit from them.
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