Many a time, the terms like CTC derive a big question mark as to its understanding. Every individual has to find its way through such a dilemma, considering he/she is working in the corporate sector. We, in order to simplify the basic salary structure, have prepared an in-depth article into the world of COST TO COMPANY.

Well, CTC or ‘Cost to Company’ is the total expenditure that the company incurs on its employees. In simple words, it is the total amount of salary credited into the account of an employee in question.

The CTC includes basic income components such as the basic pay, kind allowances, various reimbursements, etc that increase the remuneration of the employee. In addition, many annual components such as provident fund, gratuity, bonus pay, etc are listed in the salary description too. The readers need to understand that the amount at which they start their jobs does not actually get credited into their account. Instead, it is something that they will get at the end of their employment cycle.

Therefore, CTC= Gross Salary + PF + Gratuity

We have formulated a well-described structure that can easily clear the doubts related to the components listed on CTC.

To know more, DIVE DEEPER!

The term ‘Basic Salary’

Basic salary is the minimum fixed compensation that the employee receives for his/her work. It constitutes at least 40-60% of the CTC structure. It is calculated by keeping aside all the benefits and bonuses the employee might be entitled to. The employee needs to understand that the basic salary is dependent upon the designation of the person.

Monetary Allowances

The word ‘allowances’ always brings a huge smile on the faces of many. Not only it adds to the income-in-kind but also takes care of the psychological being of a person.

The allowances are provided in addition to the basic pay of the employee. Every employee is entitled to a certain sum of money that adds to the final salary. Below is the list of some allowances provided by the employers in the corporate sector.

– House Rent Allowance: This allowance is paid by the employer to care of the expenditure related to the rented facility of the employee.

– Dearness Allowance: This is provided to tackle the situations of inflation in the economy. It can be referred to as the emergency fund for the employee. However, this is only provided in the public sector and governmental enterprises. Some private companies may allow for the same.

– Leave Travel Allowance: As the term says, it is given to cover the traveling charges of the employee on business. It should be known that this does not look after the accommodation, food, and other preliminary expenses of the employee.

– Conveyance Allowance: This is as same as the LTA. However, it covers the charges of traveling from home to the work facility on a daily basis.

– Several reimbursements: This section comprises all the expenses incurred by the employee on business. It is to be understood that those expenses were meant to conduct the employer’s tasks. Therefore, these are to be paid back to the employee. However, proper bills for the same are to be submitted as proof.

– Special Allowances: In addition to the above, the employee is entitled to many allowances such as medical, hospitality, food coupons, per diem incentives, etc.

These allowances indirectly increase the increment of the employee class. It should be observed that every company has its own allowance policy. Therefore, there is no set structure or specific numbers put up by a particular industry.

Provident fund Scheme

This is the investing scheme whereby both employer and employee contribute a certain sum of money in the employee’s benefit. This amount is accessible only after the retirement of a person.

Two cases lie under this:-

– If the basic salary of the employee is less than Rs.15,000, then the employer contributes 12% of the basic pay.

– If the basic salary is more than Rs.15,000, then it is up to the discretion of the employer on how much to contribute. In this case, the employer can contribute 12% of the basic pay or 12% of 15,000 which is Rs.1800.

Thus, both the parties are supposed to contribute 12% of the set amount in the Employee’s Provident Fund account. It is mandatory for the Indian Registered Companies to make such contributions.

Gratuity

Another component of CTC that is received by the employee at the end of his or her employment. This is the amount that is deducted by the employer from the employee’s salary every year.

Although this amount is paid to the employee only after a period of 5 years, the employer can deduct it annually from the start. This is one of the incomes that are given for the services provided by the employee.

Health Insurance

One of the initiatives taken by the employers to look after the well-being of its employees. However, it is not followed by every company out there.

A certain sum of money is deducted from the employee’s salary every month and is paid towards the insurance premium. This is inclusive in the CTC structure but is not considered while calculating the net salary.

Tax liability

There are two kinds of taxes in this category that are paid by the employees.

Income tax is the tax that is paid out of the employee’s salary every month. The salary is credited into the account of the employee usually after deducting the income tax. It is for this reason, this tax is also termed as ‘TDS’ or ‘Tax Deduction at Source’.

On the other hand, professional tax or ‘PT’ is the tax charged by the state governments of the country. It is usually taken to let an individual perform a certain profession within the territory. Usually, a lump sum of Rs.2,500 is paid ever year. However, the tax liability also depends upon the salary of the person in question.

Every state has its own rate of professional taxes. As of now, 16 states and union territories do not charge professional taxes from its residents.

Total Gross Salary 

In easy words, add everything a person gets in his/her income account. This is calculated by taking the basic pay plus allowances before deducting any taxes.

Net salary/Actual Income-in-hand

This is the actual salary a person receives at the end of the calculation. It is taken out by adding basic pay to the allowances of every type and then deduct all the taxes levied on it.

Therefore, Net salary= Basic Pay + Allowances – Employee Provident Fund – Taxes (PT and TDS).

We sincerely hope that our fellow readers are able to figure out what lands in their income accounts ultimately. Moreover, this article gives them a solution to negotiate what they might want in order to have a good and stable lifestyle.

Cost to company structure is not only important for an employee. But also enables the companies to form a financial budget that comprises and satisfies the needs of every employee in the payroll.

Disclaimer:

The information contained herein is of a general nature and is not intended to address the circumstances of any person or entity. Although we endeavor to provide accurate and timely information, there is no guarantee that such information is accurate as of the date it received or that it will continue to be accurate in the future. No one should act on such information appropriate professional advice after a thorough examination of the situation.

Author Bio

Qualification: CA in Practice
Company: Rastogi & Co (Member Firm PBS Ltd)
Location: Navi Mumbai, Maharashtra, IN
Member Since: 30 Mar 2020 | Total Posts: 7

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3 Comments

  1. SANJIB KUMAR MONDAL says:

    As per Gratuity Act 4.81% should be considered as a provision and accordingly calculated and paid to the employee.
    Under section 4 (C) 2 of The Payment of Gratuity Act, 1972 for every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages (Basic + Dearness Allowance) based on the rate of wages last drawn by the employee concerned:
    Gratuity payable = [15 / 26] * [Last monthly salary drawn] * [Years of service]. Gratuity Calculation for monthly basis on its basic wages which is = (15/26) / 12 months =0.577 /12 = 4.81%.

  2. SANJIB KUMAR MONDAL says:

    Gratuity amount is not to be deducted from the employee’s salary.
    It is a gratuitous gift from the employer to the employee for completing 5 years of continuous service and no amount from the salary is to be deducted for gratuity. Every year, the company has to create a liability, a provision for payment of gratuity. In some company’s, they assign the allocation of gratuity in the hands of a insurance company.
    But nowhere the gratuity amount comes from the pocket of the employee.

    1. Samaksh24 says:

      We are under discussion of CTC components of the organisations. In some practical scenarios when the employee receives offer letter from the organisation the CTC shows the gratuity as a part of their joining benefits.

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