CTC or Cost to Company is the payment credited to employees by the employer for the service rendered to the company or in another word it is the expenses a company incurs when hiring an employee. The Cost to Company is made up of various elements that include House Rent Allowance (HRA), Provident Fund (PF), Medical Insurance, etc.
As important as a higher CTC is, it is also very important to understand the components that collectively make up a salary structure. When one gains a better understanding of one’s CTC then it introduces many ways to save on income taxes and ways to increase the take home salary.
Direct benefits in CTC are paid to the employees every month and it is a part of the employee’s take home salary, subject to taxation.
Some of the most common benefits (perquisites) given by the employer are as follows:
Plainly put, Cost to Company is basically an employer’s expenses for hiring and sustaining the services of the employee. Due to the variable nature of CTC, the take home salary and the net salary of an employee also vary accordingly. The amount of Cost to Company is never similar to the amount of money that the employee takes home.
The CTC calculation can be formulated as follows:
Total CTC = Direct Benefits + Indirect Benefits + Savings Contributions
If an employee is being given a salary package of 7 lacs per annum as the total CTC, his/her monthly salary should be Rupees 58,333 but after Income Tax deductions, PF contributions etc. the take home salary will be less than 58,333 as per the salary structure. This is due to the fact that CTC is the sum of a variety of components and not every of these components will be in-hand salary of the employee.
Out of the CTC, salary elements like gratuity, provident fund, and pension benefits get contributed to the employee’s long-term savings account. Another deduction that happens, resulting in a decreased take-home salary is the Income Tax that gets deducted at the source (TDS) by the employer.
As the name suggests, Gratuity is a segment of the employee’s salary that is paid as a gesture of gratitude for the services rendered to the company. An employer either pays the Gratuity benefit out of the company’s fund or provide a Gratuity Group Scheme (Insurance Premiums). In most cases, Gratuity is paid to the employee at the time of retirement or while leaving the company. As per the policy under Section 10 (10) of the Income Tax Act, Gratuity is payable to an employee only if he/she has completed 5 years of service in the company. The Gratuity part of the income is taxable.
Perquisites are defined as the benefits given to an employee due to his / her designated position in the company. This benefit is an extra amount payable in addition to the monthly salary. Depending upon the nature of Perquisites, it can be either taxable or non-taxable.
Gross Salary is defined as the amount of salary paid to an employee after adding every benefits and allowance, before tax deductions. Gross Salary is inclusive of bonuses, overtime pay, holiday bonuses, and any other monetary allowance that is added to the salary structure.
The Employee Provident Fund in India offers employee benefits scheme under the policy of Ministry of Labour. The Employee Provident Fund Organization (EPFO) is the authority in India that mandates policies related to EPF, pension schemes and insurance schemes. In EPF, the employer must contribute 12% of the employee’s Basic Salary towards the EPF account.
Under Section 17 (1) following are the amounts that are included in the salary given to an employee:
To calculate Income Tax, the sum of Gross Salary is deducted with all the eligible deductions. For example; calculation of taxable income is determined by deducting House Rent Allowance benefit, EMI on a home loan (if applicable) and any investments made under section 80C and 80D. The taxation procedure is different for self-employed taxpayers and salaried individuals.
Gross Salary = Cost to Company - EPF Contribution - Gratuity.
Basic salary is the amount paid to an employee, exclusive of any type of compensation. While Gross salary is the amount of salary paid before deduction of taxes or other deductions. The amount of Gross Salary is inclusive of extra payment for overtime, holiday reimbursement, bonuses etc.
Net Salary is the employee’s take home salary and it is the total after all permitted deductions have been made.