Employees sometimes misjudge the difference between their bank balance and the amount of compensation that the company has committed. Companies typically provide employees with a CTC amount, which is distinct from the amount that is deposited into their bank accounts. New hires who are just beginning their careers after college graduation frequently ask HR questions about this.
Here, we will attempt to cover everything there is to know about CTC, including how you can easily calculate the same.
About CTC or cost to the company
The CTC, or annual CTC, is the total amount that the firm spends on each employee, including all benefits, salaries, and utility costs. Furthermore, CTC in remuneration does not take into account the employee’s net income but rather other extra services that are given to them as security and necessity for their survival. Allowances, performance incentives, statutory raises, reimbursements, gratuities, etc. might all be considered supplementary perks.
There are two primary components of a CTC. They are
CTC = Statutory additions + Gross Pay.
However, there is frequently a misunderstanding between basic compensation and gross remuneration. The employee’s base pay is their income before any modifications or deductions. On the contrary, the gross revenue includes the company’s performance bonuses, allowances, and base pay.
All financial and non-financial expenditures on an employee are included in CTC. All of the items listed below are a component of the in-hand wage and are thus included in the CTC compensation.
The components of CTC include:
- Basic
- Special Allowance
- Leave Travel Allowance or Concession (LTA / LTC)
- Conveyance allowance
- House Rent Allowance (HRA)
- Medical allowance
- Incentives or bonuses
- Telephone / Mobile Phone Allowance
- Vehicle Allowance
- Dearness Allowance (DA)
Compulsory deductibles make up a sizable portion of CTC. Deductions for things like health insurance and provident funds are among them. They do not come with an in-hand wage, but they are a component of the pay structure. Nevertheless, these components help in increasing your CTC.
CTC is the amalgamation of your basic salary along with the benefits you will receive from the company.
What is Gross salary?
The gross pay accounts for the basic income, any company-provided allowances, and incentive prizes, which may be distributed monthly or yearly depending on the company’s discretion. The equation shown below can be used to determine any employee’s gross salary:
Gross salary = Basic salary + Bonus + Reimbursements + Allowances
What is the basic salary?
The basic pay is the amount of money that employees are paid based on how many days they have served and what position they have. It is the main portion of the CTC (between 30% and 50%), and it is paid in full. The minimum wage criteria established by the State government and Industry must be met by the employee’s base pay. In accordance with the Income Tax Act of 1961, the employee’s basic compensation is entirely taxable.
What is the net salary?
The final income received by any employee is their net salary, which is the result of all aggregations and deductions. It is also known as the take-home pay in layman’s terms. The following calculation formula is used to calculate your net salary:
Net Salary = Gross Salary – Income Tax – Statutory deductions
The employee’s payments for gratuity, EPF, ESIC, and taxes that assist employees with medical and social security benefits are the deductions included in the calculation above.
A lot of allowances included in CTC are taxable.
About allowances
Employees receive allowances in addition to their base pay as a financial bonus for a variety of living expenses. These allowances are a component of the CTC, and each firm allots these CTC in different manners. As a result, unless certain exclusions are available as provided by the Income Tax Act, allowances are taxable. This also allows for any individual’s budget to be divided into taxable, non-taxable, and partly taxable categories.
City Compensatory Allowance
CCA or City Compensatory Allowance is offered to employees who live in cities like Mumbai or Delhi, etc. to help with the high cost of living and other expenses.
Overtime Allowance
When an employee works over the usual shift hours to fulfill goals and project deadlines, they are eligible for the 100% tax-deductible overtime allowance. An employee’s overtime pay is computed at a rate that is two times their base pay for each hour worked.
Uniform allowance
Employees receive the uniform allowance, as the name implies, which is completely exempt from taxation under section 10 of the Income Tax Act, to help cover the cost of the uniforms.
Meal Allowance
The meal allowance is provided in order to cover essential dietary needs, which may also include snacks, tiffin, or drinks. As a result, the food allowance, which is restricted to Rs. 18,000 per year under section 10 of the Income Tax Act, is eligible for a 100% tax exemption.
Conveyance Allowance
Employees might get a conveyance allowance to cover the cost of getting to and from work. In accordance with the rules stated by the government’s Income Tax Act, the allowance given may be taxable or non-taxable. As a result, the transportation allowance given to the employees is totally distinct from the transportation allowance.
The stipend is only free from taxes up to a maximum of Rs. 1600 per month ( which makes the figure Rs. 19200 annually) for workers, and Rs. 3200 per month for employees with orthopedic disabilities. Also, remember that UPSC members are not required to pay taxes on the stipend.
How to calculate your CTC from the basic salary?
| Category | Main components | Amount in Rs. (Yearly) |
| Basic salary | Basic salary | 5,00,000 |
| Allowances | House rent allowance
Entertainment allowance Medical reimbursement Dearness allowance Conveyance allowance Overtime allowance |
90,000
10,000 20,000 50,000 12,000 20,000 |
| Extra benefits | Provident fund
Medical insurance |
60,000
3000 |
| Cost to the company | 765,000 |
To conclude
For the first time, the CTC calculation procedure could appear daunting. Employers are nevertheless required to follow the appropriate calculations, even if it poses no risk to employees. Making a checklist of the subsequent stages is the only thing that must be assured. However, when you take in the elements one by one and with the aid of technology, calculating staff pay just takes a few seconds.
