How is CTC calculated?
Cost to company is calculated by adding the basic salary and the extra benefits that an employee receives. Benefits such as EPF, ESI, gratuity, HRA, Meal and Travel allowance, and medical insurance are some CTC’s factors.
Formula
CTC= GROSS SALARY+INDIRECT BENEFITS+ SAVINGS
Gross salary – This is the employee’s take-home salary that is paid on a monthly basis and is subjected to government taxes.
Indirect benefits – Benefits that employees get on the behalf of the company are indirect benefits. Employees don’t pay for them, instead the company pays for them. It is added to the employee’s CTC as it is a cost to company.
Savings – Savings refer to the monetary value added to the CTC, like EPF.
Example of CTC calculation
Suppose an employee’s salary is ₹34,000 and the company pays an extra ₹16,000 for their DA, HRA, LTA, Medical allowance, Bonus, and reimbursements. Thus, the total earning per month is ₹50,000. Now suppose, the statutory deduction per month is ₹2,520 in EPF, ₹200 in Professional Tax, ₹157.5 in ESIC, and ₹2,800 in income tax. Thus, the total deduction is ₹5677.5.
Employer’s contribution to EPF, Gratuity, ESIC, and the bonus is ₹6,465.
Then Total Gross salary = ₹50,000 /month
Net income= ₹37,857 /month
CTC= ₹56465.5 /month
What are the components of CTC?
Cost to company (CTC) includes many components. It has basically three parts: Basic salary, allowances, and deductions.
Basic salary
The most important part of CTC is the basic salary. This is the amount that is paid to an employee for the services that they offer to the company. The basic salary is usually 40% of the overall CTC. The basic salary is a major part of the take-home salary and is subjected to income tax.
Allowances
Allowances constitute the major portion of take home salary. Allowances are the perks and benefits (direct and indirect) that the company offers to the employees. These perks and benefits are a crucial part of the cost to company as they act as lucrative for the top talents.
Allowances include:
- House Rent allowances
- Dearness allowances
- Medical allowances
- Meal allowances
- Travel allowances
- Entertainment allowances
- Incentives and bonuses
- Telephone/Mobile/Internet allowances
- Leave Travel allowance (LTA)
- Petrol/Vehicle allowances
- Books/periodicals allowances
- Special allowances
CTC is often described as the overall cost the organisation incurs for an employee. It is typically different from take-home salary, which reflects the amount received after applicable deductions.
In India, these allowances are subjected to different income tax rules. There are different rules when it comes to deducting income tax for these allowances. Employers and employees can review how perks and benefits are treated for income tax under company policy and applicable rules. Clarifying this may help employees estimate their take‑home pay. Clarification about this in the job offer letter helps to build a transparent relationship between the employer and the employee.
Deductions
The final part of the cost to company is the deductions. These statutory deductions include provident fund, gratuity, professional tax, and income tax. Professional tax and income tax are applied based on applicable rules and an employee’s circumstances. Organisations commonly review these requirements using official sources.
Is gratuity a part of CTC?
Gratuity is commonly paid to employees in recognition of long service. The Payment of Gratuity Act, 1972 outlines eligibility and payment requirements. Organisations typically refer to official guidance or seek professional advice to understand how these requirements apply to their situation. The gratuity is an amount paid out of gratitude. This concept was legalized by the Payment of Gratuity Act, of 1972. Under this act, payment of gratuity is mandatory for employers. Gratuity is payable to an employee on termination/resignation from employment after continuous service for a minimum of 5 years in a single organisation.
Ideally, this amount should not be added to CTC, because it’s a mandatory requirement and anybody is uncertain about completing 5 years of service in the company. If a company shows a gratuity component in CTC or makes periodic set‑asides, its policy can specify how any such amounts are treated if someone leaves before five years (for example, whether any discretionary ex gratia payment is considered).
Difference between CTC and take home salary
The concept of cost to company is not defined in any Indian law. Thus, sometimes it can be misleading too. It varies from company to company. Some companies offer current CTC, but some offer deferred CTC. Your annual CTC is your current CTC and payment of a separate amount on fulfillment of some conditions is called deferred CTC. Gratuity is an excellent example of deferred CTC, which is paid on the condition of completing 5 years of service.
What is the meaning of CTC?
The meaning of CTC for a layman is the cost that a company bears for an employee. Its components can be monetary as well as non-monetary. As discussed above CTC structure includes many deductibles that form a part of the overall salary. These do not come in the employee’s hand. This makes the meaning of CTC confusing. In this scenario, the concept of take home salary comes in.
Some employers choose to outline salary components in offer letters to support clarity, depending on organisational policy and practice. In comparison to CTC, the take home salary is the amount deposited in the employee’s account every month. This is calculcated and transferred, after all the necessary deductions like PF, TDS, PT, etc.
Example of calculating take home salary
Your monthly take home salary is the actual amount that you are paid after taking away all the deductions from your gross salary. It could be confusing, let us simplify it with an example.
Suppose, your CTC is ₹7.5 lakh and the company pays you ₹50,000 as a performance bonus each year.
Gross salary = CTC – Bonus = ₹7.5 lakh – ₹50,000= 7 lakh
Let us assume your
Professional tax deduction is ₹2400 yearly
EPF contribution= 12% of ₹15,000= ₹ 1800
Your yearly EPF contribution= ₹ 1800 × 12 = ₹21,600
Company’s yearly EPF contribution= ₹21,600
Let’s assume the insurance deduction per year is ₹2,000
Total deductions = PT + EPF + EPF (company contribution) + Insurance= ₹2,400 + ₹21,600 + ₹21,600 + ₹3,000 = ₹48,600.
Total yearly take home salary = Gross salary – Total deductions= ₹7 lakhs – ₹48,600 = ₹6,42,400.
Monthly take home salary = ₹6,42,400/12 = ₹53,533
Tips for answering “What is your CTC?”
Considerations some employees review when discussing CTC include understanding their salary breakdown and confirming variable components, depending on organisational practice.
- Check the complete breakdown of your total CTC given in your offer/appraisal letter
- Have a clear understanding of your net salary after deductions
- Identify your fixed and variable amounts such as bonuses/incentives/rewards and recognition
- Contact your HR business partner to understand your CTC breakup
- Discuss your in-hand salary or net salary with the gross breakup
- Mention the extra perks and incentives you are getting apart from your net salary and other breakups
What are the CTC benefits in India?
The ‘Cost To Company’ benefits in India is of two types: direct and indirect.
Direct benefits – They are paid to an employee on a monthly basis and are a part of the take home pay. These benefits reach employees directly in their bank accounts. These benefits are subjected to different taxes, so an employee has the freedom to get exemptions and save income tax on these benefits.
Indirect benefits – These benefits are given to employees without them having to pay. But, it does not mean that they are free. Mostly, the company bears the payment of these expenses. The monetary value of these expenses is added to the CTC of the employee. These benefits are subjected to different rules of the income tax act.
Advantages of flexible benefit plan in CTC
The Flexible benefits plan in India allows employees to modify CTC components. It helps to reduce the tax liability of the employees to a great extent. The tax treatment of reimbursements depends on applicable rules. Organisations and employees typically review how reimbursements are treated for tax purposes using official sources.
Some organisations view flexible benefit plans as a way to offer employees choice within their salary structure. The perceived advantages may vary by organisation. FBP increases the chances of employers attracting the top talents in the market. It drives employee satisfaction and effective recruitment and retention. Introducing FBP in cost to the company can be extremely beneficial for both employees and employers.
Salary negotiations can vary in complexity depending on the organisation and role. Due to the lack of defined laws on CTC, it can be misguiding most of the time. Cost to company is a wide term and can have many interpretations and components. Some employers aim to communicate salary components clearly during hiring discussions, depending on internal practice. Employees often review contract terms to understand salary components and other conditions. Some organisations choose to explain salary structures during hiring discussions in line with their internal processes.
