Employees are still confused about CTC and gross salaries. Understanding the difference between CTC, basic pay, net income, and gross salary is important. Some working professionals understand the difference between these two terms, but most people have many questions about them. Here is an explanation of the meaning of Cost to Company and how it is different from other salary types.
What is CTC stand for?
CTC is the amount spent by the company on hiring an employee.
It is the sum of salary and additional benefits that an employee gets while working within a company. It is the complete package and annualized salary of an employee offered by the employer.
To understand it thoroughly, employee costs to the company are the total sum that the employer spends on him. It is the amount bears by the company to sustain and hire an employee.
CTC is the wholesome benefit that employees withdraw from the company in tangible and intangible forms.
CTC is not a fixed pay. It is the variable pay as the indirect and direct expenses of the company on its employees may change yearly.
An employee doesn’t necessarily receive the CTC in cash as additional benefits are received in an intangible form.
How is CTC calculated in Salary?
CTC is the sum of three vital components. These are direct benefits, indirect benefits, and saving contributions.
The direct benefits are the allowances paid in cash form. These are basic pay, dearness allowance, conveyance allowance, House rent allowance, leave travel allowance that is LTA, earned leaves, mobile allowances, incentives, and bonuses.
The indirect benefits include income tax savings, subsidized loans, sick leaves leased accommodation provided by the company, subsidized meals and food coupons, insurance premiums paid by the company, etc. Saving contributions include gratuity and EPF.
CTC = Gross salary + Direct benefits + indirect benefits + saving contribution
For example,
Mr. A applied in firm B for a vacant job position and was selected. He received a CTC of 900,000 rupees, and his annual CTC breaks up looks like this:
| Basic Salary | 500,000 |
| Medical Allowance | 55,000 |
| House Rent Allowance | 45,000 |
| Mobile and telephone allowance | 20,000 |
| Travel Allowance | 60,000 |
| Leave and Travel Allowance | 40,000 |
| Dearness allowance | 66,371 |
| Provident Fund Contribution | 84,000 |
| Gratuity | 29,629 |
The breakup of CTC components
It represents the total of direct benefits (such as employee yearly salary), indirect benefits (such as perks), and saving contributions (such as retirement or investment plans). The benefits include bonuses, statutory compliance, and allowances.
Direct Benefits
- Basic Pay –It is the initial amount of salary excluding allowances & deductions an employee earns. It is fully taxable and usually forms 40%-50% of CTC.)
- Dearness Allowance – Dearness allowance is an allowance an employee gets paid for living expenses to cope with inflation. An employee’s DA is calculated on a percentage of their basic salary and is also fully taxable
- Conveyance Allowance –The business-related expenses associated with transportation, accommodation, and meals while traveling for the organization’s purposes are known as conveyance allowance. The deduction for transportation and reimbursement of transportation expenses has been discontinued from the financial year 2018-19. Instead, the standard deduction has been introduced, which is available to all individuals earning income from salary.
- House Rent Allowance – House rent allowance is a form of financial aid that provides a monthly payment to eligible tenants to help cover the cost of their accommodation. According to section 10-13A of the Income Tax Act, HRA is exempt from tax among the following
- The House Rent Allowances that the employer gives.
- An employee living in a metro city of India is eligible for an HRA tax exemption of 50%.
- Employees living in non-metro cities can be exempted from HRA by 40%.
- An employee’s actual monthly rent for the residence minus 10% of their basic salary.
- Leave Travel Allowance – Leave travel allowance is a payment made to an employee by their employer to cover the cost of their travel when they are required to attend work-related meetings. Only the actual fare of rail, airplane, or bus incurred by the employee is exempt.
- Earned Leaves – It is paid to employees who have worked for their employer for over 240 days in a calendar year. Employers can track and maintain employee leave records using the attendance and leave management system.
- Mobile Allowance – The company provides a monthly allowance to its employees to use mobile phones for business purposes.
- Incentives and bonuses – Incentives and bonuses are fully taxed and are the compensation paid to employees for their excellent work to encourage a higher level of performance from them.
Indirect Benefits
- Subsidized Loans – A subsidized loan is a form of financial aid provided to help students who may not be able to afford the cost of education by the government.
- Sick Leaves – Sick leaves are a form of paid leave compensated to employees who cannot work for a while due to illness. The company determines how many sick days employees are entitled to based on the company policy
- Medical Insurance Premiums – A medical insurance premium is the amount of money a company pays to an insurance company to provide health insurance benefits to its employees.
Savings Contribution
- Employee provident fund – It is a retirement savings plan to benefit employees where the employee and employer contribute a certain amount of money in the Employee Provident Fund account. In other cases, disabled people who cannot work may also be eligible for pf
- Gratuity – Gratuity is offered as a token of appreciation for an employee’s services to the company. An organization with ten or more employees is subject to the law, which applies to all states except Jammu and Kashmir.
What is the basic salary for CTC?
Basic salary in CTC refers to the fixed pay received by the employee before any additional payments and deductions. It is the minimum amount of money earned by the employee. It excludes overtime pay, bonuses, allowances, and other compensatory benefits.
The basic salary is taxable. Other components in the payslip like PF, ESIC, and Gratuity are calculated based on the basic pay. The basic salary is a part of the net salary or taking a home salary.
The employers maintain a timesheet to record time in and out of employees to calculate incentives and rewards. The additional earnings of an employee from overtime will not increase his basic salary.
Take home/Net vs. Gross Salary
Gross salary
Gross salary refers to an employee’s yearly/monthly salary before deductions. The components of the gross wage include basic pay, allowances, and perquisites.
- Basic pay covers salary remunerations, salary arrears, the incentive for overtime, bonuses, performance-based cash awards, etc.
- Allowances include HRA, travel allowance, medical allowance, dearness allowance, special allowances, etc.
- Perquisites are fuel charges, rent for electricity, sick leaves and accommodation, etc.
Gross salary = Basic pay + allowances + perquisites
The components that do not include calculating gross salary in a payslip are gratuity, free snacks, meals, travel allowance, medical insurance, and leave encashment applicable during retirement.
An employee’s taxable salary in India is derived after making deductions in the gross pay. As per the rule of 80C, the person is liable to pay taxes on a gross salary after deductions like PF, LIC, PPF, and Mutual fund.
Considering the above table showing the CTC of Mr. A, his gross salary would be
Gross salary of Mr. A = 900,000 – (84,000 + 29,629) = INR 786,371
Net salary or take-home salary
Net salary refers to the employee’s net pay after deducting the gross salary amount. Some deductions are mandatory, and some depend on the employer policy.
Net salary = Gross salary – Income-tax (TDS) – Professional tax – Gratuity – EPF
Income tax is generally TDS (tax deducted at the source), and professional tax on earning individuals gets deducted from gross salary. EPF(Employee provident fund) is a type of pension scheme in India and gratuity is a monetary benefit rewarded as a token of appreciation to employees.
How to calculate taxable income?
To calculate your taxable income, you must subtract certain deductions from your gross salary. Steps to follow:
Step 1: To calculate your gross salary, add HRA (house rent allowance), DA (Dearness Allowance), travel allowance, and special allowance to your basic salary.
Step 2: You’ll need to take professional tax, HRA exemptions, and standard deductions from your gross salary.
Step 3: Include any commissions/bonuses, interest-related income, etc., in the total amount.
Step 4: Then, deduct various expenses listed in Section 80C, 80D, and Chapter VIA of the Income Tax Act.
Step 5: Your taxable income is the amount that determines your income tax bracket and rate.
What is Expected CTC?
ECTC(Expected Cost to Company) stands for the total salary package a job seeker expects when they are willing to join a company. Once the individual gets hired, ECTC becomes CTC.
How does Akrivia HCM Payroll software help?
Akrivia HCM Payroll Software can reduce the hassle of managing payroll for businesses with high employee turnover. This system can also reduce the time and cost associated with calculating employee salaries at the required CTC, thereby staying compliant with government regulations. This solution saves users time by making complex work easy and fast. As businesses face increasing demands to perform complex, labor-intensive tasks, automation offers a way to save time and increase overall efficiency.
