How To Calculate The CTC Structure (Formula And FAQs)

By Indeed Editorial Team

Published 17 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Cost-to-company (CTC) is the total amount that a company spends on its employees in a year. There are certain formulas that can help you calculate CTC easily. Understanding different terms and the formula to calculate the CTC can help you learn the base of your salary structure. In this article, we discuss how to calculate the CTC structure and learn about its different components.

Related: What Is Salary Structure And How To Make One (With Samples)

How To Calculate The CTC Structure?

Exploring the steps on how to calculate the CTC structure can help you understand different components of your salary. The total salary package that an employee receives from the company in a year is known as CTC. This includes several benefits, free meals, insurance and other expenses. Many companies often use the term CTC package while offering jobs to candidates.

You can calculate CTC by adding the salary and all the benefits that you receive from the company. CTC represents the amount a company bears to employ and sustain all employees. Here are the steps to calculate the CTC structure:

1. Determine your basic salary

Basic salary is the basic income of an employee and may range between 40% to 50% of the gross salary. The basic salary of an employee serves as the foundation of CTC calculation, as it is a fixed component. Basic salary excludes any bonuses or allowances or bonuses. The company pays a basic salary to employees for their services to the organisation. It forms a major part of the take-home salary of employees. The basic salaries of employees are taxable. Employees with higher basic salaries pay higher taxes on it.

Here is the formula to calculate your basic salary:

Basic salary=gross salary-all allowances

Related: Gross Salary And Net Salary: Definitions And Examples

2. Find out house rent allowance

Many companies offer house rent allowance to their employees for paying rent. Usually, house rent allowance is a tax-free component. Companies provide house rent allowance to employees for meeting the cost of living in rented property. Section 10 (13A) of the Income Tax Act regulates the calculation of house rent allowance. The amount of this allowance may vary depending on the salary and the location of the employee.

3. Find your dearness allowance

Companies pay a certain percentage of the basic salary to employees to help them mitigate the impact of inflation. The dearness allowance may vary depending on the location of the employees. Dearness allowance is subject to taxes. In the public sector, the government pays a dearness allowance to the serving employees and pensioners.

There are the following types of dearness allowances:

  • Variable dearness allowance: Central government pays their employees variable dearness allowance. The government may revise variable dearness allowance every six months to mitigate inflation.

  • Industrial dearness allowance: The government offers industrial dearness allowance to public sector employees. This allowance may get revised every quarter depending on the changes in the consumer price index.

Related: What Is Salary Breakup? Why It Is Important To Know

4. Determine medical and conveyance allowances

Medical allowance is the amount that companies pay to their employees to meet their medical expenditure. This allowance forms a part of the salary structure of employees. Employees can claim their medical allowance without submitting any medical bills. This allowance is taxable.

Many companies offer their employees transport allowance to compensate for their travel expenses to and from their workplace and residence. Employers offer conveyance allowance in addition to the basic salary of the employees. There may be a tax on conveyance allowance depending on how much the company is offering to an employee. Companies who are unable to provide any transportation services to employees offer conveyance allowance to them.

5. Find out leave travel and other allowances

Leave travel allowance is the benefit that companies provide their employees for meeting the travel expenses when they are on leave. This allowance is eligible for tax exemption under the Income Tax Act. Employees can show proof of their travel expenses to claim this allowance. Many companies only cover domestic travel under the leave travel allowance.

Aside from the basic salary and allowances, there are some additional benefits that employees receive from the companies. These allowances may be fully taxable. Additional allowances that employees receive may include servant allowance, entertainment allowance, meal benefits and children's education allowances. Additional allowances may vary from company to company.

Related: What Is A Salary Slip? Importance, Components And Format

6. Add incentives or bonuses

Many companies offer a performance reward to employees, which is known as an incentive or bonus. Employers often set an incentive as a reward for the completion of a specific set of performance objectives. The amount that employees receive as a bonus is taxable and gets added to the gross salary.

There are the following two types of incentives that companies offer to employees:

  • Casual incentives: This incentive is a reward on a smaller scale. Employers may offer a non-monetary gift or small amount of cash as a bonus to the employees.

  • Structured incentives: Many companies often outline structured incentives as part of their incentive programmes. This incentive may include a monetary reward that employees receive for achieving sales or targets.

Related: How To Calculate A Bonus In Easy 3 Steps (With Types)

7. Deduct employee provident fund

Employee provident fund is a retirement benefits scheme by the government. According to this scheme, both the employees and employers contribute around 12% of their basic salary to an employee provident fund account. If you are an employee, then your contribution towards the EPF is non-taxable. During an emergency, employees are able to withdraw some part of their provident fund after a year of work experience.

Related: What Is A Take-Home Salary Calculator? (Components And FAQs)

8. Deduct professional and income tax

The final part of CTC includes certain deductions, such as professional tax. The policies regarding professional tax may vary depending on the state of the company. Professional tax is a direct tax that the government may impose on employees. The rate of this tax may vary from state to state. According to the Income Tax Act, the employer may deduct specific professional tax from the gross compensation of an employee.

Income tax levies on the personal income of an individual. Many companies provide salaries to their employees after deducting the tax amount. The income tax amount may vary depending on the tax slab and tax rate. The process by which companies deduct tax amounts from the salaries of their employees is called tax deduction at source or TDS. The company pays the deducted tax amount to the government.

9. Find out gratuity

Gratuity is the part of the salary that you may receive from your employer upon leaving the job. An employee can only receive gratuity after a set term of service. This amount gets deducted every year from the CTC. Companies offer a gratuity to employees as a token of appreciation for their long service to the organisation.

10. Use different formulas to calculate CTC

Here are some formulas to calculate the CTC and your take-home salary:

  • CTC = gross salary + gratuity + PF or CTC = basic salary + benefits + PF

  • Gross salary = basic salary + house rent allowance + additional allowances

  • Net salary = gross salary–professional tax–public provident fund–income tax

Example Of CTC Calculation

You can consider the following example to help calculate your CTC and its different components:

Suppose the basic salary of an employee is ₹50,000. The employer pays an additional ₹5,000 for health insurance and the employee contributes 12% to EPF. Then you can determine the CTC with the help of the following formula:

CTC = basic salary + benefits + PF

CTC of employee = ₹50,000 + ₹5,000 + 12% of ₹50,000 = ₹61,000

Related: Gross Income: What It Is and How To Calculate It per Month

Frequently Asked Questions Related To CTC

Here are some commonly asked questions about the calculation of CTC:

Is the cost-to-company and take-home salary different from each other?

Yes. CTC and take-home salary are two different concepts. The CTC is the total amount a company spends on an employee, while take-home salary is the net amount of income that an employee receives after the dedication of taxes and provident fund. Take-home salary along with several other allowances and benefits are the components of cost to the company.

How many types of benefits are there in the CTC?

There are the following two types of benefits in the CTC:

  • Direct benefits: Employees receive direct benefits every month as a part of their take-home salary.

  • Indirect benefits: Indirect benefits are also called perquisites. These benefits get added to the monetary value of employees' CTC and come at the expense of the company.

What is the expected CTC?

It is the amount that candidates expect from the employer in terms of their CTC. Many companies ask about the expected CTC during the hiring process. Candidates can answer the question with a negotiable.

Related: What Is Variable Pay and Why Do Employers Offer It?

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