Introduction And Meaning Of CTC

Cost to Company” (CTC) incorporates the employee’s salary package. CTC includes all components, such as basic pay reimbursements, various allowances and perks. It also includes annual components like gratuity, variable yearly income and annual bonus.

Employers use CTC to accurately represent the total cost per employee from the organisation’s perspective. This covers both direct and indirect costs. This comprehensive approach provides a clearer understanding of the true financial impact of hiring and retaining employees.

What Are Constituent Elements In CTC For Salaried Individuals?

Now that you are familiar with the definition of CTC, the following are constituents or inclusions in it:

Basic Salary: This comprises the employer’s base pay. It excludes any bonuses.

House Rent Allowance (HRA): This allowance covers accommodation expenses. It may have tax implications. It is tax-free for some individuals and taxable for others.

Phone and Internet Allowance: This allowance covers work-related communication expenses. These have now become standard for remote employees.

Incentives or Bonuses: Additional bonuses, such as performance or annual incentives, increase overall CTC. 

Special Allowances: These are unclassified funds in CTC encompassing remaining amounts not designated elsewhere. 

Understanding these components provides a comprehensive understanding of employee compensation within the CTC framework. 

What Is Included In CTC (Cost to Company)? 

Understanding the benefits included can help you grasp different parts of CTC. These advantages are more than just basic salary. They form part of the comprehensive compensation package provided by the employer.

Direct Benefits

Direct benefits in CTC include basic salary and allowances, which are direct financial compensation employees receive that contribute to their monthly income.

Indirect Benefits

Indirect benefits consist of perks like insurance gratuities and allowances that indirectly improve employee welfare and add to the complete compensation package.

Savings Contribution

Savings contributions comprise components such as the Employee Provident Fund (EPF), which ensures that a portion of CTC goes towards the employee’s future financial security and well-being. 

What Is The Difference Between CTC And Gross salary? 

When an employer pays an employee, the total amount is called the gross salary. This is the sum of money a company spends on employees, known as cost to company (CTC). Gross salary is the total amount, but the employee’s take-home pay is the net salary. Net salary includes various allowances and perks.

The amount obtained after deducting EPF, Gratuity and other deductions from CTC is referred to as gross salary. Gross salary equals Basic Salary plus HRA plus Special Allowance plus Conveyance Allowance plus Medical Allowance plus Leave Travel Allowance (LTA)

In the context of employment, in-hand salary refers to the total income an employee receives after deducting taxes, incentives, and other withheld amounts. This includes contributions to private funds or retirement plans from their gross salary. It represents the employee’s earnings and offers a transparent view of their net income after all deductions have been accounted for. 

How Is CTC Calculated? Let’s Understand With Real Life CTC Example

CTC is essential to determining an employee’s financial situation. It encompasses their yearly remuneration, including all perks and take-home pay. It fluctuates based on elements like base salary and benefits and variables. 

The computation combines gross salary with benefits like EPF, gratuity allowances, insurance, and travel expenses. In essence, CTC represents the total cost to the employer for hiring and maintaining its employees. 

CTC = Gross Salary + Allowances (for example, House Rent Allowances) + Gratuity + EPF + Group Insurance + Other benefits such as travel expenses.

Here, Allowances may include – Dearness allowance, house rent allowance, entertainment allowance, meals allowance, cash allowance, city compensatory allowance, overtime allowance, project allowance, etc.

Now, let’s understand what CTC is in salary with examples. Suppose an employee named Mr Vivan has a gross salary of Rs 10,00000 annually. Additionally, the employer provides allowances of Rs 200,000. EPF totals Rs 40000. Group insurance is Rs 1,50000 in a year. Other benefits, like travel expenses, amount to Rs 40,000. Then, the CTC for Mr Vivan in that year will be calculated as follows –

CTC = Gross Salary + Allowances (for example, House Rent Allowances) + Gratuity + EPF + Group Insurance + Other benefits such as travel expenses

CTC = Rs 10,00000 + Rs 2,00000 + Rs 40,000 + Rs 150,000 + Rs 40000

CTC = Rs 14,30,000

In this situation, the employee’s total cost to the company (CTC) for the year would amount to Rs 14,30000. This figure includes basic salary and all supplementary elements, including allowances and perks the employer offers.

Calculation Of Net Salary (in-hand salary) For Salaried Individuals From Gross Salary? 

1) Calculating Gross Salary: First, compute your gross salary. This encompasses base salary-eligible allowances, bonuses, and other taxable elements. 

2) Recognise Exemptions: Some salary components are not subject to income tax. Typical exemptions include House Rent Allowance (HRA).

To qualify for HRA exemption, you must live in a rented home and receive HRA as part of your CTC. Then, provide valid rent receipts and proof of rent payments. The amount of HRA exemption you can get depends on your salary, rent amount, HRA received, and city of residence. 

HRA exemption can be claimed for the lowest of the following amounts: 

– Subtract 10% of the basic salary and dearness allowance from the actual rent paid to determine the actual HRA received.

– For individuals residing in metro cities (Delhi, Kolkata, Mumbai, or Chennai), the HRA is 50% of the basic salary and dearness allowance.

– The HRA is 40% of the basic salary and dearness allowance for individuals residing in non-metro cities.

3) When calculating your taxable salary, deduct Leave Travel Allowance (LTA) and Standard Deduction from gross pay. 

If you opt for a new tax regime, you won’t be able to avail of leave travel allowance tax exemption. 

4) Deduction Calculation: You have the opportunity to apply for deductions under different parts of the Income Tax Act like Section 80C (about investments such as Provident Fund PPF, life insurance), Section 80D (for health insurance premiums) and Section 24b (for home loan interest). Deduct these amounts from your taxable salary to determine your net income. 

5) Calculate Taxable Income: You will arrive at taxable income once you consider exemptions and deductions.

6) Utilise Income Brackets and Tax Rates: In India, the tax system progresses with various income brackets and associated tax rates determine tax that applies to each bracket according to your taxable income.

7) Calculate total income tax liability by adding up tax liability for each slab.

8) Consider any rebates and surcharges that may apply based on your situation. Under the new tax regime, individuals with taxable income up to Rs. 7 lakhs may be eligible for a refund under Section 87A.

9) Determine Health and Education Cess Include Health and Education Cess (currently 4%) in your overall tax obligation.

10) Final Tax Due Upon considering all factors, you determine your ultimate income tax obligation for the fiscal year.

11) Advance Tax and TDS As a salaried individual, your employer deducts tax Deducted at Source (TDS) from your monthly salary. This TDS amount is then offset against your ultimate tax liability. Moreover, if tax liability exceeds Rs. 10000 for the financial year, you might be required to make Advance Tax payments in instalments. 

12) Submit your income tax return (ITR) to the income tax department to comply with regulations and disclose your income deductions and tax payments.

Frequently Asked Questions (FAQs)

What is the in-hand salary?

In-hand salary, also known as take-home salary, is the salary obtained after deducting taxes and other deductions. The blog above discusses how to calculate in-hand salary. 

What is the difference between CTC and in-hand salary or net salary? 

CTC includes gross salary along with allowances and perks offered to employees by employers. On the other hand, net salary is the salary that an employee takes home after subtracting deductions and taxes from the employee’s CTC.

What is the formula for CTC?

CTC = Gross Salary + Allowances (for example House Rent Allowance) + Gratuity + EPF + Group Insurance + Other benefits like travel expenses 

Who determines the CTC of an employee in an Indian company? 

Usually, in Indian Companies, an employee’s CTC is determined by the Human Resources or Finance department.

How is the Basic salary calculated?

The basic salary is calculated by subtracting total allowances (such as Medical Insurance HRA, DA Conveyance, etc.) from gross pay. Alternatively, basic salary can be determined as a percentage of CTC or gross pay. Basic pay generally equates to 40% of gross income or 50% of an individual’s CTC. 

What are the factors determining the Basic salary calculation of employees? 

Employers and employees discuss and agree upon this figure when they sign employment terms and conditions. This component is part of the employee’s overall compensation package and varies based on job title. Calculating basic salary is not standardised and varies between companies. The reverse calculation method typically involves a percentage of the total wage and CTC.

Ready to invest like a pro? Unicorn Signals app equips you with 100+ Free tools and knowledge you need to succeed. Download the Unicorn Signals app and gain access to daily stock lists and insightful market analysis and much more!