An employee’s salary is determined by several parameters like his/her profession, skillsets and years of experience, location of profession, salary structure, tax bracket that they belong to, etc. An employee’s monthly salary comprises of several components – Cost To Company, Gross Salary and Take Home Salary. It is often confusing for us to differentiate among them.
Let’s take a close look at each of them - Cost To Company, Gross Salary and Take Home Salary.
CTC is nothing but the total package of the salary of an employee. It shows the total expenses that an employer is willing to spend for an employee during the financial year.
The below illustration will give you a clear perspective of the various components of Cost To Company:
| DIRECT BENEFITS | INDIRECT BENEFITS | SAVINGS CONTRIBUTIONS |
|---|---|---|
| Basic Salary | Interest Free Loans | Super Annuation Benefit |
| Medical Allowance | Subsidized Meals & Food Coupons | Employer Provident Fund (EPF) |
| Conveyance Allowance (CA) | Company Leased Accommodation | Gratuity |
| House Rent Allowance (HRA) | Life & Medical Insurance premiums paid by employers | |
| Dearness Allowance (DA) | Income Tax Savings | |
| Leave Travel Allowance (LTA) | Office Space Rent | |
| Vehicle/Fuel Allowance | ||
| Phone Allowance | ||
| Incentives or Bonuses | ||
| Special Allowance & City Compensatory Allowance |
As evident from the above, Cost To Company is the summation of Direct Benefits, Indirect Benefits and Savings Contributions. Direct Benefits refers to the amount paid to an employee annually, while Indirect Benefits implies to the amount the employer pays on behalf of the employee on an annual basis. Saving Contributions are the schemes in which employee or employer or both invest for making a savings for the employee.
Let’s take a look at each of these components in detail:
Let’s say Mr. Sharma’s CTC is Rs. 4,00,026. The breakdown of his CTC is as below:
Basic Salary: Rs. 1,92,600
House Rent Allowance (HRA): Rs. 1,06,300
Conveyance Allowance (CA): Rs. 19,200
Medical Allowance: Rs. 15,000
Employee Provident Fund (EPF): Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 27,000
Gross Salary includes Gratuity, Employee Provident Fund (EPF) and Super Annuation Benefit whichever is applicable. These, referred to as Savings Contributions, are offered by an employer to their respective employees. The contributions towards these are added to the Cost to Company (CTC) for the employee. These amounts are paid before the taxes are deducted and include bonuses, holiday pay, over-time pay, and other differentials.
Employee Provident Fund (EPF): This is an employee-benefit scheme under the authority of the Ministry of Labour, India. The Employee Provident Fund Organisation (EPFO) presides over decisions related to EPF, insurance schemes, pension, etc. The employer contributes a minimum of 12% of the employee’s monthly income towards his/her EPF account.
Employees are given the benefit to withdraw the entire amount accumulated in his/her PF account during the time of his/her retirement or earliest at the age of 55 years.
Under this scheme, employees also have the advantage of withdrawing the amount during certain specific situations:
Gratuity: This is a contribution made by the employer towards an employee’s salary as a sign of his/her gratitude towards the services offered by the employee. This is paid at the time of his/her retirement/superannuation, retrenchment, migration due to better employment opportunities or voluntary retirement. However, an employee has to complete at least 5 years of full-time employment with the employer for his/her gratuity to attract tax benefits under Section 10(10) of the Income Tax Act, 1961. Gratuity is a percentage of an employee’s basic salary, generally 4.81%.
Net Salary or Take Home Salary is the actual salary that an employee takes home after every relevant Tax Deductions at Source (TDS) have been completed.
Take Home Salary = Gross Salary – Income Tax – Employees Provident Fund – Professional Tax Income Tax is based on the Total Taxable Income of the employee and is deducted at source by employers. Basic salary of an employee has to be a minimum of 50% to 60% of his/her Gross Salary.
What is Cost to Company (CTC)?
Cost to Company (CTC) is the sum total of Direct Benefits, Indirect Benefits and Savings Contributions. Direct Benefits is paid to an employee by his/her employee, while Indirect Benefits refers to the amount the employer contributes on behalf of the employee on an annual basis. Saving Contributions are the schemes in which employee or employer or both invest for making a savings for the employee. Let’s take a closer look at each of these elements:
Example of CTC:
Let’s say Mr. Sharma’s CTC is Rs. 4,50,000. The breakdown of his CTC is as below:
Basic Salary: Rs. 1,92,600
HRA: Rs. 1,06,300
CA: Rs. 19,200
Medical Allowance: Rs. 15,000
EPF: Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 27,000
What is Gross Salary?
Gross Salary includes Gratuity, Employer Provident Fund (EPF) and Super Annuation Benefit. These, referred to as Savings Contributions, are offered by an employer to their respective employees. The contributions towards these are added to the Cost to Company (CTC) of the employee. These amounts are paid before the taxes are deducted and include bonuses, holiday pay, over-time pay, and other differentials.
Employee Provident Fund (EPF) - This is an employee-benefit scheme under the authority of the Ministry of Labour, India, and presided over by the Employee Provident Fund Organisation (EPFO). The employer contributes at least 12% of the employee’s income every month towards his/her EPF account.
Employees are given the flexibility to withdraw the entire amount accumulated in his/her PF account during the time of his/her retirement or earliest at the age of 55 years.
Employees also have the convenience of withdrawing the amount accumulated in their account on specific situations like:
Gratuity – This is a contribution made by the employer towards an employee’s salary as a sign of his/her gratitude towards the services offered by the employee. It is generally calculated at the rate of 4.81% of the basic salary of an employee.
This is paid at the time of his/her superannuation, retirement, voluntary retirement, retrenchment or migration due to better employment opportunities. However, an employee has to complete a minimum of 5 years of full-time employment with a particular employer, so that the gratuity amount attracts tax benefits under Section 10(10) of the Income Tax Act, 1961.
What does Take Home Salary mean?
Net Salary or Take Home Salary is the actual salary that an employee takes home after all the tax deductions at source (TDS) that is applicable as per his/her salary bracket have been carried out.
Take Home Salary = Gross Salary – Income Tax – Employees Provident Fund – Professional Tax
What does in-hand salary mean?
In-hand salary refers to the actual salary that an employee takes home after every relevant tax deductions at source (TDS) have been completed.
In short, Take Home Salary = Gross Salary – Income Tax – Emloyees Provident Fund – Professional Tax
