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Identifying the differences between Basic and Gross Salary

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.

Types of CTC benefits

Direct benefits in CTC:

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.

Indirect benefits in CTC:

Indirect benefits in CTC are the advantages that an employee avails without having to pay for those benefits. The employer authorizes such benefits and its monetary value gets compounded in the CTC.

Some of the most common benefits (perquisites) given by the employer are as follows:

  • Loans without interests
  • Food coupons or sponsored meals
  • Company accommodation or quarters
  • Medical Insurance or Life Insurance sponsored by the employer
  • Pick and drop facility
  • Income tax savings
CTC benefits

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.

Calculating Cost to Company (CTC)

The cost to Company (CTC) is the sum of Direct Benefits (payments credited to employees on a yearly basis), Indirect Benefits (payments made by the employer on behalf of the employee) and Saving Contributions (saving schemes the employee can benefit from).

The CTC calculation can be formulated as follows:

Total CTC = Direct Benefits + Indirect Benefits + Savings Contributions

Reason behind Variance between Take Home Salary and CTC

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.

Take Home Salary and CTC

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.

Defining Gratuity

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.

Defining Perquisites

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.

Understanding Gross Salary

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.

Gross Salary as per Section 17 (1)

Under Section 17 (1) following are the amounts that are included in the salary given to an employee:

  • Wages
  • Fixed annual sums or pension (under the policy of Income from other sources, family pension received by the heir of an employee falls under taxable income).
  • A gratuity given to employees.
  • Commission, perquisites, profits etc. instead of salary or in addition to the salary.
  • Advance salary given to the employee.
  • Leave encasement or payment credited to the employee instead of leave.
  • The annual funds added to the balance of the employee’s provident fund (this part is chargeable for taxation under Rule 6 of part A of the Fourth Schedule).
  • The total of all fund transferred from an unrecognized provident fund to a recognized provident fund as per sub-rule (2) of Rule 1] of Part A under the Fourth Schedule.
  • Any contributions made to the account of an employee by the Central Government or employer in the previous year, under a pension scheme as mentioned in Section 8OCCD.

The Deductions from Gross Salary

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.