Congratulations, you have landed your first job! However, the new job comes with new challenges and a lot of new learning. The first thing that will make you confused is what CTC means. Many people have a misconception that the cost to the company or CTC means the in-hand salary. Now, it is important to understand the difference between annual CTC and taxable income because the former is calculated by including salary and benefits, and the meaning of CTC is the total salary package. To help you understand “what is CTC?,” here is a detailed guide. You will find out what the cost to company means, how it is calculated, and the components you should keep in mind. Let’s take a look below!
How is CTC Calculated in Salary?
CTC means Cost to Company; it’s a term widely used in India to describe the total salary package of an employee. It refers to the amount of money an employer spends when hiring a new employee. So, the organisation pays a monthly wage and extra benefits to an employee at a cost to the company. Let’s take a look at the formula of CTC to understand how it’s calculated:
CTC = Gross Salary + Indirect Benefits + Savings
Also Read: A Quick, Simple Guide To Your Salary Breakup
Components of CTC or Cost to Company
CTC has different elements and it is divided into three categories. Following are the components of CTC mentioned:
1. Gross Salary
Gross salary means the total amount of money that an employee earns before deductions such as pension contributions and taxes are taken out. It includes the base salary along with allowances and benefits.
2. Indirect Benefits
Perks that employers pay for you on behalf of a company are indirect benefits. So, you will not have to pay for health insurance, meal allowances, travel allowances, dearness allowances, incentives, etc. It is added to your CTC as it is the cost to company. In India, the indirect benefits can be subjected to income tax. This is a way for companies to reduce the liability of the employees to pay taxes. It is important to clarify the take-home salary and taxes to maintain a transparent relationship between an employer and employee.
3. Deductions
Deductions refer to monetary value added to the CTC, such as EPF. The statutory deductions are income tax, professional tax, gratuity, and provident fund. Remember, the professional tax is based on the government and the income tax depends on the employee’s tax bracket.
Now, you should remember that gratuity is an element of CTC. The Payment of Gratutity Act, of 1972 legalised it as a part of gratitude. The gratuity should be paid when you leave the company before 5 years of service as an ex gratia.
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Is CTC the Same as Gross Salary?
The whole remuneration paid by an employee is considered as gross salary. The total compensation is CTC; however, the net salary is what you take home. It includes the take-home pay, including perks and allowances. So, your gross salary includes the basic salary, conveyance allowance, special allowance, HRA, and LTA. The CTC structure comes with many deductibles that come as a part of the overall salary. You will not get the deductibles in hand, and sometimes, it seems confusing. Always ask about the components when you get the job offer to get a clear understanding of the home salary. The take-home salary is the amount deposited in your account every month. So, you get the take-home salary after the necessary deductions such as PT, TDS, PF, etc.
| Feature | CTC (Cost to Company) | Gross Salary |
| Definition | Total annual expenditure incurred by a company on an employee. | Total earnings of an employee before any deductions. |
| Components | Basic salary, allowances, PF (employer’s contribution), gratuity, bonuses, incentives, insurance, etc. | Basic salary, allowances, performance-based pay, etc. |
| Negotiation Basis | Often used as a starting point for salary negotiations. | Less common as a negotiation basis, usually discussed after CTC is agreed upon. |
| Transparency | Often less transparent as it includes components not directly received by the employee. | Generally more transparent as it directly relates to the employee’s earnings. |
| Tax Calculation | Not directly used for tax calculations. | Forms the basis for income tax calculation along with other income sources. |
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Example of In-Hand from Gross Salary
Let’s say, you earn ₹7,50,000 per annum and the professional tax would be ₹2,400 per annum. Then employer’s and employee’s contributions would be 12% of the basic salary. So, your basic salary would be ₹4,00,000 per annum.
Calculate PF contributions:
Employee’s PF: ₹4,00,000 * 12% = ₹48,000
Employer’s PF: ₹4,00,000 * 12% = ₹48,000
Calculate total deductions:
Professional Tax: ₹2,400
Employee’s PF: ₹48,000
Employer’s PF: ₹48,000
Total Deductions: ₹2,400 + ₹48,000 + ₹48,000 = ₹98,400
Calculate in-hand salary:
In-hand salary = Gross Salary – Total Deductions
In-hand salary = ₹7,50,000 – ₹98,400 = ₹6,51,600 per annum
Calculate monthly in-hand salary:
Monthly in-hand salary = ₹6,51,600/12 = ₹54,300
So, How to Answer “What Is Your CTC?”
During an HR interview round, you are usually asked about your current CTC. Here are a few tips you should consider while talking about your CTC:
1. Check the breakdown of your entire CTC mentioned in the appraisal or offer letter.
2. Check your fixed and variables like incentives and bonuses.
3. Have an understanding of your take-home salary after deductions.
4. Identify the additional perks and incentives you can get besides the net salary and other deductibles.
What is Taxable Income and How Is It Calculated?
Taxable income is a part of the total income and it is subjected to taxation. You can calculate it by eliminating the deductibles and exemptions from your gross income. Here’s how you can calculate taxable income:
1. You can calculate the gross salary by including travel allowances, HRA, DA, and special allowances from the basic pay.
2. Then deduct the professional tax, standard deductions, and HRA exemptions from the gross salary.
3. Include any bonus additional income from interest, etc. the amount you get.
4. Eliminate the deductions as mentioned under Sections 80D, 80C, and Chapter VIA of the Income Tax of India.
5. The amount you get is the taxable income. Now, the income tax slab and rate are applied as per the final income.
Now, you know what CTC in salary means and the components included in your offer letter. As there is no specific legal guideline about CTC, it can be misguiding. CTC in salary means many things, and a high CTC may seem appealing. After the deductions, your in-had salary may not seem impressive. As you dive into the professional world, it is essential to decipher the deductions and take-home salary. In case you notice some discrepancies, always reach out to your company experts for better understanding.
Frequently Asked Questions
1. What is a CTC in salary?
CTC stands for Cost to Company and represents the total annual salary package an employer spends on an employee, including base pay, benefits, and taxes.
2. Does CTC include PF?
Yes, CTC includes PF. It’s a component that contributes to the total cost a company bears for an employee.
3. Is CTC monthly or yearly?
CTC stands for Cost to Company and represents the total annual expenditure a company incurs for an employee, including salary and benefits.
4. Is CTC before or after tax?
CTC (Cost to Company) is the total salary package before any deductions. Your take-home salary is the amount you receive after taxes and other deductions are applied.
5. Is joining bonus part of CTC?
Yes, a joining bonus is typically included in CTC. However, it’s a one-time payment and doesn’t reflect your regular salary.
