Understand Salary Breakup and CTC

If you are joining a company for the first time or changing your job, it is important for you to understand the difference between CTC (Cost of Total Employee Expenditure) and the amount of salary you will take home .

This information will be helpful in your discussions with HR regarding your pay structure and CTC.

How much the company spends on an employee is not understood. Normally we understand the terms and conditions of the company.

There is a difference between the CTC determined by the company for the employee and the salary the employee takes home. Annual CTC increases, it does not mean that the monthly salary of the employee has also increased.

What exactly is this CTC and what is your eligibility? In this article, the misconceptions that often arise regarding CTC and salary structure have been clarified.

Demystified Cost of Company

Sahil is a Fresh Software graduate, who is a renowned I.T engineer. Gets appointment in the company. He was very happy to get a package of 6 lakhs in his very first job. Taking the package as the basis, he made a brilliant plan to spend the first month’s salary.

As per the plan, he will buy an expensive gift for the family. Will buy a shiny new barque. Will get a new mobile phone. But when the first salary came in his hand, he felt that it would take time to complete all his plans. The first take home pay she received was less than she had anticipated.

He contacted HR. HR explained him the break up of CTC, which he had seen at the time of joining and did not pay much attention to.

Cost of the Company Means

How much does the company spend on an employee? In this, monetary benefits given to the employee and non-monetary benefits such as monthly salary, training cost, residential facility, telephone, medical expenses reimbursement and other expenses, which are incurred by the company on an employee.

Hence, CTC does not mean the salary received per month, which comes in hand. CTC is formed by adding the monthly salary and other benefits that are given to the employee.

Parts of CTC (Components):

Many attractive provisions are made in CTC for the employees to remain mentally connected with the companies. Some part of the salary is kept as such, on which income tax is deducted, but some part is kept as such, on which income tax is exempted. The components of your CTC and the groups in which it can be placed are:-

1) Fixed Salary: This is the bulk of the CTC you take home, it has the following components-

• Basic Salary: Basic salary is given for providing service to the company, which is not exempted from income tax.
• Dearness Allowance: This is to improve the standard of living of the employee, on which income tax is deducted.
• House Rent Allowance (HRA): If you live in a metropolitan city, 50 percent of the sum of basic pay and dearness allowance and if you live in other cities, then 40 percent of it is given as house rent allowance.
• Convenience Allowance: This allowance is given for commuting, which can be Rs 800 per month, which is exempt from income tax.

2) Reimbursement: This is the portion of CTC for which you bill and are paid by the company.

• Coupons for buying food items: Some companies give coupons to their employees to buy food items at a cheaper rate.
• Cafeteria: Under this provision, food is provided to the employees at a subsidized rate, the cost of which is borne by the company itself, which is a part of the CTC. If cash is not given for this, then income tax is not deducted on it.
• Mobile/Telephone Bills: Many companies reimburse the mobile/telephone bills of the employees on claiming a certain amount which is decided. There is no exemption of income tax on this payment.
• Medical Reimbursement: Expenses incurred on medical and medicines are paid once every month or year, which is considered as taxable income, but if billed, income tax is exempted up to Rs.15,000.

3) Retirement Benefits: These benefits are available on retirement or resignation from company services

• Provident Fund: An amount of 12 per cent is deducted from the salary of the employee for provident fund fund, whose equal share is matched by the employer. This amount added by the employer is available only on retirement or resignation. The amount of contribution made by the employer and the expenses incurred are added to the CTC.
• Service Gratuity (Graduate): The employer arranges this fund in association with insurance companies. The annual portion of the fund kept by the employer towards service gratuity is added to the CTC, which is sometimes shown in the CTC.

4) Other Benefits and Facilities

• Leave Travel Charges (LTC): This is the charge in which the facility of travel is given by the company to the employees taking leave. If the employee avails this facility twice in a block of four years, then the expenditure incurred is exempted from income tax.
• Medical Allowance: Some companies provide medical facilities to their employees and their family members to take care of their health. The cost incurred on this facility is added to the CTC.
• Support for pension and insurance premium: The premium for the health insurance of the employee and the amount paid by the company for the pension scheme are added to the CTC.
• Other additional benefits: Facilities like electricity charges, servants, house furniture, credit cards and residential accommodation are also provided by the company to the employees. This cost is added to the CTC.
• Fixed Annual Bonus: Bonus is paid every month or in some cases once a year, depending on the performance of the employees, which is fully taxable.
• Productivity Linked Variable Bonus: This bonus, which is variable, is paid on 100% achievement of the productivity target and is considered as a part of CTC.

Now You Must Have Understood What is CTC

Each company calculates the cost differently. Now let’s talk about Sahil, from whose example it can be understood that not necessarily by looking at CTC, we can take home a lucrative amount as salary every month. Sahil now understood that the company’s expenditure on him for training and development was a part of the CTC.

Therefore, understand the breakup of CTC very well, so that you can get information about what benefits are being given to you so that you can get the correct information about your eligibility.

If you have just joined a company, then by looking at the breakup of CTC, you can negotiate with HR to increase that part of his salary, which he can take home every month.