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CTC stands for “Cost To Company” or "cost of hire" and refers to the cost to the company of hiring a new employee. If you are an employee or a job seeker, you should know that your offer letter or CTC letter will include information on the CTC-Cost to Company. The complete structure of CTC will contain several components; therefore, for understanding your salary better, it is essential to know about the CTC components.

What is CTC?

The cost to the business, or CTC, is the cost a company incurs when recruiting a new employee. CTC comprises various allowances, including House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance, among others, that are added to the basic pay. These allowances may include free meals or meal coupons from companies like Sodexo, office space rent, transportation service to and from the office, and subsidized loans, among other things. All of these variables, when added together, make up the total Cost to Company.

CTC does not equal take-home pay; instead, it includes a variety of allowances, as stated above. Your CTC is frequently used to determine annual appraisals and raises. CTC is made up of numerous parts. The components of CTC, on the other hand, differ from one employer to the next. Government employers, for example, may have a different CTC structure than private-sector businesses. Employees in the government sector are frequently paid in grade pay. The employee's seniority determines this payment.

Definitions for Understanding CTC

Basic Salary

The basic pay is the fixed sum paid to the employee. The major component of the CTC system is basic pay. It is a fixed salary component that typically accounts for 40% to 50% of the total CTC. Many additional CTC components, such as provident fund contribution, gratuity, and others, are based on the basic pay. This is the total before any deductions, increments, bonuses, or allowances are applied. In contrast to other parts of the CTC, the base wage would stay unchanged. 

Gross Salary

The gross salary is the amount an employee earns throughout a fiscal year while employed by the firm. This figure does not include any deductions, such as professional tax, income tax, or medical insurance. It does, however, cover amounts like bonuses, overtime pay, and holiday compensation.

Costs to the Company

The cost to business, or CTC, is the amount spent by a firm to hire or retain personnel, either directly or indirectly. It is the complete pay package that the firm offers to the employee and the total costs that the company incurs in one fiscal year for the employee.

Different Components of CTC

There are several CTC components as given below -

Allowance- An allowance is a set sum granted by the employer as part of the CTC to cover a certain type of expense incurred by the employee. Depending on the nature of the allowance, it may be partially taxable, totally taxable, or non-taxable. Some allowances are dependent on the employee's position, while others are available to all employees regardless of position.

Dearness Allowance- This allowance is often provided as a percentage of basic salary by government employers to keep up with inflation over a quarter. The economy's inflation rate determines the percentage of dearness allowance.

HRA- HRA stands for housing rent allowance. It is offered as part of the employee's rent expense for their residence. Even within the same company, the HRA component varies in different cities. As allowed by the income tax act, the HRA allowance is partially exempt.

Conveyance Allowance- Allowance for out-of-pocket expenses related to getting from home to work and vice versa.

Medical Allowance- This benefit is included in the CTC. By submitting medical bills at the intervals set by the employer, one can claim a tax exemption against this allowance. Medical expenses incurred by the self, spouse, children, and dependent family members are usually eligible for the medical allowance exemption.

Leave Travel Allowance- As part of their CTC, some employers offer a leave travel allowance. The journey fare is exempted, but only under certain criteria provided out in the statute. This year, the government created an LTC cash voucher scheme, which lets you use your LTA benefit to pay for specific goods or services.

Allowances for training, telephone, books, and periodicals- Many firms set aside a percentage of the CTC for external training expenses, cell bill payments, and book/periodical purchases.

Unique allowances- Some firms provide employees special allowances to adjust the total CTC they receive. This is a completely taxed benefit.

Provident Fund- A portion of the employee's salary is placed in their PF account. The contribution is made by both the employer and the employee. 

How much PF is deducted from CTC?

 The PF account is funded with 12% of the employee's basic wage.

• According to the employer's policy, other allowances, such as children's education or hostel allowance, uniform allowance, daily allowance, tour allowance, and food coupons, may be included in the CTC components structure. 
• An employee can seek exemption for such allowances by producing bills or proof of expenditure to their employer before the end of the fiscal year.
• Variable pay, such as a performance bonus or a percentage of sales commission, is sometimes included as part of salary components.

Also Read: What Is A Salary Slip? Why Is It Important? What Is It's Format?

Indirect Benefits of CTC

The different indirect benefits received by the employees include -

1. Income tax saving
2. Food Coupons
3. Interest-free loans
4. Company leased accommodation
5. Health and life insurance premium paid by the employer

Savings Contributions

• Employer provident fund
• Superannuation benefits

Salary in hand

The take-home pay is also known as the net pay. After all deductions such as provident funds and taxes have been made, the employee pays the total amount. In most cases, the net compensation is less than the gross income. However, it may be equal when the income tax is zero, or the amount payable to the employee is less than the government tax slabs. Benefits such as conveyance allowance, medical allowance, and housing rent allowance are included in an employee's gross income.

Calculation for Salary

A formula is employed in a basic salary calculator to determine the pay based on different parameters such as CTC (Cost to Company), bonus, and other data. The salary calculator explains different deductions such as employee provident fund, insurance, and professional tax and calculating in-hand or take-home pay. This can be used for calculating components of CTC as well as the In-Hand Salary.

Example of Calculation of In-Hand Salary From CTC

Let us Assume Mr X is offered a CTC of Rs. 9 Lakhs per year. The breakup of the CTC components has been given as follows -

1. Basic Pay = Rs. 4,50,000
2. House Rent Allowance (HRA) = Basic Pay x 30% 

                                                 = 4,50,000 x 30% = Rs. 1,35,000

3. Special Allowances = Rs. 2,46,000
4. Food Coupons = Rs. 15,000 per year
5. Contribution by Employer to the Provident Fund = 12% of basic pay 

                                                                             = 4,50,000 x 12% = Rs 54,000

Provident Fund is a retirement saving scheme in which both the employer and employee contribute 12% of basic salary mandatorily in the PF Account.

Now, let us calculate In-Hand salary

We will have to reduce the following from the total CTC -

Provident Fund Amount = 12% of basic pay (Employee's Contribution) + 12% of basic pay (Employer's Contribution) = 54,000 + 54,000 = Rs. 108,000

Amount of food coupons = Rs. 15,000

Total Tax Liability including cess

For this, we have to calculate tax liability and cess 

As per the Old Tax Regime - 

Net Taxable Income = Total CTC - HRA exemption - PF Contribution (Employee & Employer both) - Food Coupons 

HRA exemption will be the lower of - 

• Actual HRA = Rs. 1,35,000
• 50% of Basic Salary if living in Mumbai, Chennai, Kolkata or Delhi otherwise 40%
  • Let's say 50% of 4,50,000 = Rs. 2,25,000
• Rent paid - 10% of basic pay = Rs. 96,000- 10% of 4,50,000 

                                               = Rs. 96,000-45, 000 

                                               = Rs. 51,000 (Assuming monthly rent is Rs. 8,000) 

Thus, HRA exemption will be Rs. 51,000

This Net taxable income = 9,00,000- 1,08,000- 15,000-51, 000 

                                        = Rs 7,26,000

Calculation of tax liability

Under the new tax regime 

Calculation of Taxable Income = CTC - Contribution by employer to Provident Fund 

                                                 = Rs. 9,00,000 - Rs. 54,000 = Rs. 8,46,000 

Calculation of Tax Liability under the new regime 

Also Read: Standard Deduction for Salaried Individuals - FY 2021-22

Calculation of In-Hand Salary under the old as well as the new tax regime 

Under the Old Tax Regime 

In-Hand Salary = CTC - Food Coupons - Contribution to PF by Employer - Contribution to PF by Employee - Total Tax Liability including Cess

In-Hand Salary = Rs. 9,00,000- Rs. 15,000- Rs. 54,000- Rs. 54,000 - Rs. 60,008 

                            = Rs. 7,16,992 per annum or Rs. 59,749 per month

Under the New Tax Regime 

In-Hand Salary = CTC -Food Coupons - Contribution to PF by Employer - Contribution to PF by Employee - Total Tax Liability including Cess

In-Hand Salary = Rs. 9,00,000-Rs. 15,000- Rs. 54,000- Rs. 54,000 - Rs. 53,976 

                          = Rs. 7,23,024 per annum or Rs. 60,252 per month.

Conclusion

Every employee needs to be clear about the terms of their employment, such as the CTC and the In-Hand salary that they would receive. They should read the offer or CTC letter carefully. Also, it is essential to know about the various components of CTC. A clear understanding will help them be clear about their package and if they want to take up/ continue the employment or not. We hope the article has given you the required information about the CTC components, the definition of salary in hand, calculation of in-hand salary, the example of how to calculate the In-Hand Salary. 

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