Cost to Company (CTC)
Cost to Company or CTC is the cost that the company would incur on an employee. CTC is the cumulative of house rent allowance (HRA) and other allowances added to the basic salary. This may include free meals, office space rent, free cabs, subsidized loans, etc. Salary and all other benefits provided to the employee is a cost to the company and hence the name ‘Cost to Company’.
CTC is considered as variable pay as it varies based on various factors and thus when the CTC varies, the take home salary or net salary of the employee varies. This can be corrected by an individual by simply matching the CTC to the actual amount that he/she is receiving.
For example, if Kumar is given a CTC of Rs.20 lakhs which includes variable pay of Rs.3 Lakhs. Out of the Rs.3 Lakhs, Kumar has only received Rs.2 lakhs in this financial year. Hence, Kumar can declare his CTC as Rs.18 Lakhs, hence bringing it closer to the actual figure of his take home salary.
Components of Cost to Company (CTC)
Cost to Company includes all the expenses that the company has to undergo including monetary and non monetary benefits offered to the employee. Here is a tabulated diversification to all the expenses incurred by a company to employ an individual-
Basically,
CTC = Direct Benefits + Indirect Benefits + Savings Contributions
| DIRECT BENEFITS | INDIRECT BENEFITS | SAVINGS CONTRIBUTION |
| Basic Salary | Interest free loans | Superannuation benefits |
| Dearness Allowance (DA) | Food Coupons/Subsidized meals | Employer Provident Fund (EPF) |
| Conveyance Allowance | Company Leased Accommodation | Gratuity |
| House Rent Allowance (HRA) | Medical and Life Insurance premiums paid by employer | |
| Medical Allowance | Income Tax Savings | |
| Leave Travel Allowance (LTA) | Office Space Rent | |
| Vehicle Allowance | ||
| Telephone/ Mobile Phone Allowance | ||
| Incentives or bonuses | ||
| Special Allowance/ City Compensatory allowance, etc. |
Usually, house rent allowance (HRA) is 30% of an employee’s basic salary and conveyance sums up about 10% of his/her basic salary.
Direct Benefits refer to amount paid to the employee monthly by the employer which forms part of his/her take home or net salary and is subject to government taxes.
Indirect Benefits refer to the benefits that employees enjoy without paying for them. The company pays them on behalf of the employee but adds these expenses to the employee’s CTC as it is an expense from the company’s point of view.
Savings contribution refers to the monetary value added to the employee’s CTC.
Gross Salary
Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC).
Employee Provident Fund, in India, is an employee benefit scheme prescribed by the Ministry of Labour which provides employees with facilities such as medical assistance, retirement, education for children, insurance support and housing. The Employee Provident Fund Organisation (EPFO) has the authority to mandate policies on EPF, pension and insurance schemes.The employer is required to contribute at least 12% of the employee’s salary towards his/her EPF.
Furthermore, the employee can then withdraw the full amount accrued in his/her PF account at the time of retirement, which is when the employee attain the age of 55 years.
In the occurrence of any of the following situations also, the employee can withdraw the amount accumulated in his/her PF account-
- Termination of services
- Retirement due to permanent disability
- Migration for taking employee abroad
Gratuity, on the other hand, is a section of an employee’s salary that is paid by the employer as a token of gratitude for the services that the employee offered during the employment tenure. It is a defined benefit plan and is offered to the employee at the time of his/her retirement.
An employee may leave his/her job for various reasons, such as, retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
Under Section 10 (10) of the Income Tax Act, an employee receives gratuity after completing 5 years or more of full time service in an organisation.
In the example of Kumar, let us take his salary after subtracting gratuity and Employee Provident Fund contributions to come up to Rs.15 Lakhs. This will now be considered as his gross salary which is his total personal income before taking taxes and other deductions into account.
Net Salary or Take Home Salary
Net salary, which is more colloquially known as take home salary is the income that the employee actually takes home post tax and other deductions. It refers to the in hand figure that is calculated after deducting Income Tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary is Income Tax deductions, Public Provident Fund and Professional Tax subtracted from gross salary, which means,
Net Salary = Gross Salary (-) Income Tax (-) Public Provident Fund (-) Professional Tax
Public Provident Fund and Employee Provident Fund are a stipulated percentage of the employee’s salary, typically no less than 12% of the basic salary. Whereas, gratuity is a percentage of the basic salary, typically 4.81% of the employee’s basic salary.
Therefore, an employee’s take home pay should ideally look like-
Take home pay = Direct benefit (-) Income Tax (-) PPF (-) other deductions.
Income tax in this case is deducted at source by the employer and is based on the gross pay of the employee. Also, basic salary of an employee should be at least 50%-60% of his / her gross salary.
In the example of Kumar, his take home salary or net salary after tax and other deductions should come to around Rs. 90,000.
Kumar’s Salary Example:
| Cost to Company | Gross Salary | Net Salary |
| Rs.18 Lakhs | Rs.15 Lakhs | Rs. 90,000 |