Some HR and Accounts Terms and their Meanings

Cost to Company (CTC)

Cost to Company (CTC) is the yearly expenditure that a company spends on an employee. Each employee spend depends on their salary and variable. CTC is calculated by adding salary and additional benefits that an employee receives such as EPF, gratuity, house allowance, food coupons, medical insurance, travel expense and so on. CTC in colloquial terms is the cost an employer bears to hire and sustain its employees.

Formula: CTC = Gross Salary + Benefits.

If an employee's salary is ₹40,000 and the company pays an additional ₹5,000 for their health insurance, the CTC is ₹45,000. Employees may not directly receive the CTC amount as cash.

1. What is Cost to Company (CTC) and gross salary?

   Gross salary is the aggregate amount of compensation discharged or spent by an employer or company towards the employment of an employee, before any deductions. The aggregate compensation would be the Cost to Company or CTC to employees.

2. How is Cost to Company (CTC) calculated in salary?

   CTC = Direct Benefits + Indirect Benefits + Savings Contributions

   • Direct Benefits: This refers to the employee's take-home or net salary or the amount paid to the employee monthly by the employer and is subject to government taxes.
   • Indirect Benefits: These refer to the benefits that employees enjoy without paying for them. While the company pays them on behalf of the employee they are added to the employee’s CTC since it is an expense from the company’s point of view.
   • Savings Contribution: This refers to the monetary value added to the employee’s CTC, for eg: EPF.
     
     

3. What does Cost to Company (CTC) include?

   CTC contains all the monetary and non-monetary amounts spent on an employee. These include:

   • Basic Pay
   • Dearness Allowance (DA)
   • Incentives or bonuses
   • Conveyance allowance
   • House Rent Allowance (HRA)
   • Medical allowance
   • Leave Travel Allowance or Concession (LTA / LTC)
   • Vehicle Allowance
   • Telephone / Mobile Phone Allowance
   • Special Allowance
     
     

4. What is expected Cost to Company (CTC)?

   Expected CTC is a term used to understand what a candidate is expecting from the organisation in terms of his/her CTC.

5. Is Cost to Company (CTC) the same as take-home salary?

   Take-home pay is the net amount of income received by the employee after the deduction of taxes, benefits, and other voluntary contributions from their paycheck.

   Whereas CTC or Cost to Company is the sum or total amount a company is spending on an employee in a year. It includes the Take Home Salary along-with other benefits and allowances.

6. What is Cost to Company (CTC) breakup?

   The CTC is made up of several different components including the take home pay, benefits, allowances, and more. Here are the crucial components of the CTC break-up:

   1. Basic Salary: This is the largest part of the salary structure usually comprising 40-45% of CTC.
   2. HRA: The employer provides house Rent Allowance to the employee to meet accommodation expenses in the city of employment.
   3. Medical Allowance: It is a fixed amount paid by the employer to the employee irrespective of the actual expenses incurred for medical treatment.
   4. Employee Contribution to EPF: It is a contribution of 12% of basic salary along with dearness allowance (if any) and is deposited in the employee’s EPF account.
      
      

7. What are the Cost to Company (CTC) Benefits in India?

   There are two kinds of benefits, direct and indirect:

   1. Direct Benefits: These are paid to the employee monthly and form part of their take-home pay after deducting income tax plus any additional state taxes.
      
      
   2. Indirect Benefits: Benefits (also called Perquisites in legal Indian government terms) that an employee enjoys without paying for them. The company takes care of these however they are added to the monetary value to an employees CTC since it is an expense for the company.
      
      

8. How to make the most of Cost to Company (CTC) being offered?

   When negotiating, make sure to try and increase the direct benefits component as much as possible. Here are a few ways:

   1. Ask for conveyance allowances rather than a pick-up or drop facility, since this is tax -free.
   2. Ask for food allowance and the option to convert your subsidized food bills to it.
   3. In case the company is offering ESI benefits, ask if the health cover can be converted into into medical reimbursements.
   4. Ask for health cover for family members.
      
      

9. What is the difference between CTC and in hand salary?

   In-hand salary is the net amount of income received by the employee after the deduction of taxes, benefits, and other voluntary contributions from their paycheck.

   Whereas CTC or Cost to Company is the sum or total amount a company is spending on an employee in a year. It includes the In-hand salary along-with other benefits and allowances.

Gross Salary

Gross salary is the amount of money paid to an employee before taxes and deductions are discounted. It is the gross monthly or annual sum earned by the employee.

Gross salary is determined by the employer when the job is offered. This gross salary might come from different sources such as wage, commissions, tips, bonuses and any other economic incentive received as part of the wage and it is the baseline for any calculation made regarding the employee’s income.

The gross salary doesn’t take into account deductions or taxes that are taken out after the payment is issued, because it is the pre-negotiated amount of money stipulated at the job contract. Later on, the gross salary will be reduced by these deductions, to comply with federal or state laws or also, to pay for any other financial commitments taken by the employee that are directly taken off its gross income.

The gross salary figure helps the employee compare its level of compensation with the market average to see if his salary is competitive and rewarding, in relation to similar industry peers. On the other hand, gross salary serves as a measure to determine the employee’s payment capacity, to engage in any debt commitment.

1. What is meant by a gross salary?

   The gross salary or the CTC, is the compound salary that is entitled to the employee before all kinds of deductions are made to it.

2. How to Calculate Gross Salary?

   Gross Salary will come down to the addition of the basic salary along with all the special allowances the employer or the manager offers to the employee. This, of course, does not take into account any kind of tax deductions or any other cuts.

3. What are CTC and Gross Salary?

   CTC and Gross salary are interchangeable terms. They both have the same meaning and both can be calculated as the sum of an employee's basic salary and all the special financial allowances that they receive from the employer.

4. What is the difference between Gross Salary and Net Salary?

   The difference between Gross salary and the net salary is that while the gross salary is the sum of all the special allowances along with the basic salary, the net salary will also consider all the tax deductions and pay cuts that also come with the same.

5. What are the components of Gross Salary?

   Base Salary: The basic monthly salary that is not subject to any deductions, does not take into account any kind of allowance or benefit.

   Prerequisites: Like the bonuses or the fringe benefits an employee is entitled to by the org that they work for.

   Special allowances: Like Mobile allowance, Wi-Fi and network allowance, house rental allowance, and more.

Net Salary

Net salary is the ‘take home’ salary of an employee after statutory deductions such as taxes are made from the gross salary. Net salary is the amount an employee receives after the statutory deductions. Net Salary is the actual amount which is credited to the bank account of an employee. Income Tax is based on the Gross Pay of an employee.

Net Salary = Basic + Additions (Bonuses, Allowances) – Deductions.

Salary calculation in India

Ideal components of salary structure in India

1 .Basic salary + allowance

It is central component and the core of the salary structure. This is usually the largest component of the CTC that represents 40-45% of the total CTC. The base plays an important role in the definition of salary because other components such as Provident Fund, Gratuity and ESIC depend on it.

The high cost allocation (DA) was introduced as part of the salary to reduce the burden of inflation on salaried employees. This amount is generally established around 5% of the total CTC and, like the base component, also has an effect on PF, ESIC, etc.

2. Housing Allowance (HRA)

3. Leave the trip allowance (LTA)

4. Transportation allowance

The transportation allowance was eliminated as of April 2018. Employees do not need to collect or present proof of transportation.

5. Medical allowance

The exemption from the medical allowance was eliminated as of April 2018. Employees do not need to collect or present medical evidence.

6. Childrens education allowance

This component is paid for employee school fees and is tax deductible up to Rs. 100 per month for up to two children. Therefore, this amount is generally set to no more than Rs. 2,400 per year for an employee.

CTC calculation formula

In CTC Salary Distribution will be

(1) Basic Salary + HRA + DA

(2) Conveyance allowance+ Medical + Other / Special Allowance if any

(3) Employers Contribution for PF (12% of Basic)

Employers Contribution for ESIC (4.75% of Gross)

(4) Employees Contribution for PF (12% of Basic)

Employees Contribution for ESIC (1.75% of Gross)

Gross Salary = (1) + (2)

CTC = (1) + (2) + (3)

Net in Hand = (1) + (2) - (4) ...

Salary breaks up as:

Basic-30%

HRA- 30%

Conveyances- 25%

Medical- 10%

other- 5%...

Calculation of basic salary from CTC