In India, lakhs of youngsters join the professional workforce every year, with each of them earning different salaries depending on their job profiles and skill levels. However, if you were to ask any of them about the different aspects that form their salary, chances are you’d get blank to puzzling looks.
If you are one of them, you don’t need to be ill-informed anymore. In this page, you will learn all that you need to know about Cost to Company (CTC), Take-Home Salary, Net Salary, and Gross Salary, and the differences between them.
Let’s start with an explanation of Cost to Company, and later on get to all the other aspects of salary.
Cost To Company - CTC:
Cost to Company or CTC as it is commonly called, is the cost a company incurs when hiring an employee. CTC involves a number of other elements and is cumulative of House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance among other allowances which are added to the basic salary.
These allowances may often include free meals or meal coupons, such as Sodexo and the like, office space rent, cab service to-and-fro office, and subsidized loans et al. Basically, all these elements when combined together, form the entire Cost To Company.
To put it in simpler terms, CTC is basically a company’s spending on hiring and sustaining the services of an employee.
CTC is considered a variable pay as it varies based on various factors and thus when the CTC varies, the take home salary or net salary of the employee varies. This can be corrected by an individual by simply matching the CTC to the actual amount they are receiving.
Let’s elucidate what CTC looks like with an example:
Mr. A has been hired by a company at a CTC of Rs. 4,00,000. A breakdown of his yearly income is illustrated below:
Basic Salary: Rs. 2,20,000
HRA: Rs. 88,000
CA: Rs. 19,200
Medical Expenses: Rs. 15,000
EPF Contributions: Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 17,874
Components of Cost to Company (CTC):
The various elements of Cost To Company (CTC): As mentioned above, Cost To Company involves a number of elements. Below is a tabular column which list out all the benefits and contributions that form the part of a CTC.
CTC is basically the sum total of Direct Benefits (sum paid to an employee on a yearly basis), Indirect Benefits (sum the employer pays on behalf of the employee), and Saving Contributions (saving schemes the employee is entitled to).
CTC = Direct Benefits + Indirect Benefits + Savings Contributions
|DIRECT BENEFITS||INDIRECT BENEFITS||SAVINGS CONTRIBUTION|
|Basic Salary||Interest Free Loans||Superannuation benefits|
|Dearness Allowance (DA)||Food Coupons/Subsidized meals||Employer Provident Fund (EPF)|
|Conveyance Allowance||Company Leased Accommodation||Gratuity|
|House Rent Allowance (HRA)||Medical and Life Insurance premiums paid by employer|
|Medical Allowance||Income Tax Savings|
|Leave Travel Allowance (LTA)||Office Space Rent|
|Telephone/ Mobile Phone Allowance|
|Incentives or bonuses|
|Special Allowance/ City Compensatory allowance, etc.|
Here’s every single element of a CTC broken down:
Basic Salary: Unlike other aspects of CTC, your basic salary will not vary and remains a constant always. The entire amount of your basic salary will be part of your in-hand salary.
Allowances: As part of your salary structure, you will receive a number of allowances which help you take care of your basic needs. These include:
House Rent Allowance (HRA): HRA is part of the CTC an employer provides its employees. HRA usually comes with tax benefits in case employees pay for accommodation each year and comes up to about 10% of the take-home salary.
Leave Travel Allowance (LTA): LTA is yet another tax-exempt element of a CTC which is provided for employees to cover their travel expenses anywhere within the country. Note that an LTA only pays for the travel allowance not for other expenditures like food, drinks, and the like.
Dearness Allowance (DA): Inflation numbers keep rising year or year and Dearness Allowances are provided to tackle this issue. This is basically a cost of living adjustment given to mitigate the effects of inflation on the economy.
Other such allowances include medical, vehicle, mobile phone, incentives, and special allowances.
Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC). To put it in simpler terms, Gross Salary is the amount paid before deduction of taxes or other deductions and is inclusive of bonuses, over-time pay, holiday pay, and other differentials.
Employee Provident Fund, in India, is an employee-benefit scheme prescribed by the Ministry of Labour which provides employees with facilities such as medical assistance, retirement, education for children, insurance support, and housing. The Employee Provident Fund Organisation (EPFO) has the authority to mandate policies on EPF, pension, and insurance schemes. The employer is required to contribute at least 12% of the employee’s salary towards his/her EPF.
Furthermore, the employee can then withdraw the full amount accrued in his/her PF account at the time of retirement, which is when the employee attain the age of 55 years.
In the occurrence of any of the following situations also, the employee can withdraw the amount accumulated in his/her PF account-
- Termination of services
- Retirement due to permanent disability
- Migration for taking employee abroad
Gratuity, on the other hand, is a section of an employee’s salary that is paid by the employer as a token of gratitude for the services the employee offered during the employment tenure. It is a defined benefit plan offered to the employee at the time of his/her retirement.
An employee may leave his/her job for various reasons, such as, retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
Under Section 10 (10) of the Income Tax Act, an employee receives gratuity after completing 5 years or more of full-time service in an organisation.
For the same example listed above, let’s deduce Mr.A yearly salary by subtracting gratuity and Employee Provident Fund contributions.
Rs. 4,00,000 - Rs. 21,600 - Rs. 18,326
= Rs. 3,60,074
This amount will now be considered as his gross salary, which is his total personal income before taking taxes and other deductions into consideration.
Net Salary or Take-Home Salary:
Net salary, more commonly known as Take-Home Salary, is the income that the employee actually takes home once tax and other such deductions are carried over with. It refers to the in-hand figure that is calculated after deducting Income Tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary is Income Tax deductions, Public Provident Fund, and Professional Tax subtracted from gross salary, which means,
Net Salary = Gross Salary (-) Income Tax (-) Public Provident Fund (-) Professional Tax
Public Provident Fund and Employee Provident Fund are a stipulated percentage of the employee’s salary, typically no less than 12% of the basic salary. Whereas, gratuity is a percentage of the basic salary, typically 4.81% of the employee’s basic salary.
Therefore, an employee’s take home pay should ideally look like-
Take Home Pay / Net Salary = Direct benefit (-) deductions (taxes, PF etc.)
Income tax, in this case, is deducted at source by the employer and is based on the gross pay of the employee. Also, basic salary of an employee should be at least 50%-60% of his/her gross salary.
Mr. A’s Salary Example:
In Mr. A’s case, he comes under the 10% tax slab as his salary falls between the Rs. 2,50,001- Rs. 5,00,000 range.
Mr. A’s income stands at Rs. Rs. 3,60,074.
10% of Mr. A’s income would come up to Rs. 36,007.4.
So, Mr.A’s income after tax and other deductions would be Rs. 3,24,066.6
Bottomline, the various aspects of a salary isn’t as complicated as it is made out to be. A quick read of this page would give you all the details you will ever need.
- Direct Tax
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- Gross Salary and CTC
- Professional Tax
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- How To Calculate Income Tax
- e-Filing ITR
- How To Calculate TDS From Salary
- How To Claim TDS Refund
- Conveyance Allowance
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- TDS Rates Chart
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- Form 10C
- Form 16
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- Form 24G
- Form 24Q,26Q,27Q,27EQ,27D
- Form 26AS
- Form 27C
- Form 49B
- Section 234A, 234B And 234C
- Section 24
- Section 80C and 80U
- Section 80CCF
- Section 80CCG
- Section 80DD - Deductions On Medical Expenditure
- Section 80E
- Section 80U
- Section 87A