Have you ever noticed that the CTC that was offered to you during the hiring process and the amount you are getting in-hand has a considerable difference? Before joining any organisation, newcomers generally have a misconception that the CTC that is offered and the in-hand salary will be the same. But in reality, this is not true. There is a difference between the CTC and the take-home salary you receive at the end of every month.
The various deductions from the gross salary results in a considerable difference between the initially offered CTC and the actual in-hand salary. The CTC to take-home salary can be calculated using the take-home salary calculator. Hence, it is important to understand your salary structure and the various terminologies used.
CTC
CTC or cost to the company is the amount of money spent by the employer to hire a new employee. It comprises of several components such as HRA, medical insurance, provident fund, etc. which is added to the basic pay. The allowances may include meal coupons, cab service, subsidised loans, etc. All these elements combined form the entire cost to the company. Basically, CTC is the cost spent by the employer spent in hiring and sustaining the employee in the organization.
GROSS SALARY
Gross salary is the amount after the EPF and gratuity are subtracted from the CTC. Basically, the remuneration paid before deducting the income tax, professional tax, and other deductions. It is inclusive of bonuses, overtime pay, paid holiday amount, and other differentials.
GRATUITY
This is the part of the employee's salary that is paid by the company as a token of appreciation for the services of the company offered during the tenure of employment. It is mainly defined as the benefit provided to the employee at the time of their retirement. Under the Income Tax Act, an employee is eligible to receive the gratuity amount after the completion of 5 or more years of full-time employment at an organisation.
NET SALARY OR IN-HAND SALARY
Take-home salary or the In-hand salary is the amount which the employee receives after the tax, and other deductions are carried over. The difference between gross and net salary is that the salary that includes the income tax, professional tax, and other company policy deductions subtracted from the gross salary.
In-hand Salary = Gross Salary - Income Tax -Professional Tax
It is important to know that the CTC offered will be different from what you actually receive in-hand at the end of the month. The difference between CTC and in-hand salary are the various deductions that occur at the time of payout. The take-home salary can be increased by proper tax planning and avoiding any income tax deductions.
For instance, if the employee invests INR 1.5 lakh in tax saving entities under Section 80C such as mutual funds, PPF, etc. he/she can save on income tax. This will result in reducing the total deductions from the gross salary, thereby increasing the in-hand salary.
Difference Between Take Home, Net, Gross Salary and CTC
What is Salary?
An employee’s salary is determined by several parameters like his/her profession, skillsets and years of experience, location of profession, salary structure, tax bracket that they belong to, etc. An employee’s monthly salary comprises of several components – Cost To Company, Gross Salary and Take Home Salary. It is often confusing for us to differentiate among them.
Let’s take a close look at each of them - Cost To Company, Gross Salary and Take Home Salary.
Cost To Company (CTC)
CTC is nothing but the total package of the salary of an employee. It shows the total expenses that an employer is willing to spend for an employee during the financial year.
Components of CTC:
The below illustration will give you a clear perspective of the various components of Cost To Company:
| DIRECT BENEFITS | INDIRECT BENEFITS | SAVINGS CONTRIBUTIONS |
|---|
| Basic Salary | Interest Free Loans | Super Annuation Benefit |
| Medical Allowance | Subsidized Meals & Food Coupons | Employer Provident Fund (EPF) |
| Conveyance Allowance (CA) | Company Leased Accommodation | Gratuity |
| House Rent Allowance (HRA) | Life & Medical Insurance premiums paid by employers | |
| Dearness Allowance (DA) | Income Tax Savings | |
| Leave Travel Allowance (LTA) | Office Space Rent | |
| Vehicle/Fuel Allowance | | |
| Phone Allowance | | |
| Incentives or Bonuses | | |
| Special Allowance & City Compensatory Allowance | | |
As evident from the above, Cost To Company is the summation of Direct Benefits, Indirect Benefits and Savings Contributions. Direct Benefits refers to the amount paid to an employee annually, while Indirect Benefits implies to the amount the employer pays on behalf of the employee on an annual basis. Saving Contributions are the schemes in which employee or employer or both invest for making a savings for the employee.
Let’s take a look at each of these components in detail:
- Basic Salary: This is a constant component in your salary, and never varies. This is also referred to as the in-hand salary.
- Allowances: Further, there are a range of allowances offered over the basic salary to enable you to meet your basic daily expenses like travel to and from work, place of stay, etc. These are:
- House Rent Allowance (HRA): HRA is the component offered to the employees by the employer. Employees who contribute towards the expenses for their accommodation are eligible for tax benefits on the entire amount paid in a financial year.
- Leave Travel Allowance (LTA): This allowance offers tax exemptions on annual travel expenditures within India. These expenses include travel by train, flight, etc. However, this does not include other expenses during travel like food, drinks, etc.
- Dearness Allowance (DA): This is the adjustment for the cost of living adjustment to overcome the inflationary effects that often keep increasing every year.
- Phone Allowance: As the name suggests, this allowance is offered on an employee’s phone bill up to a certain amount every year, as specified by the employer.
- Vehicle/fuel allowance: Again, as evident from the name, this allowance pertains to expenditures towards the purchase of fuel for employee’s vehicle in a financial year.
Example of CTC:
Let’s say Mr. Sharma’s CTC is Rs. 4,00,026. The breakdown of his CTC is as below:
Basic Salary: Rs. 1,92,600
House Rent Allowance (HRA): Rs. 1,06,300
Conveyance Allowance (CA): Rs. 19,200
Medical Allowance: Rs. 15,000
Employee Provident Fund (EPF): Rs. 21,600
Gratuity: Rs. 18,326
Special Allowance: Rs. 27,000
Gross Salary
Gross Salary includes Gratuity, Employee Provident Fund (EPF) and Super Annuation Benefit whichever is applicable. These, referred to as Savings Contributions, are offered by an employer to their respective employees. The contributions towards these are added to the Cost to Company (CTC) for the employee. These amounts are paid before the taxes are deducted and include bonuses, holiday pay, over-time pay, and other differentials.
Employee Provident Fund (EPF): This is an employee-benefit scheme under the authority of the Ministry of Labour, India. The Employee Provident Fund Organisation (EPFO) presides over decisions related to EPF, insurance schemes, pension, etc. The employer contributes a minimum of 12% of the employee’s monthly income towards his/her EPF account.
Employees are given the benefit to withdraw the entire amount accumulated in his/her PF account during the time of his/her retirement or earliest at the age of 55 years.
Under this scheme, employees also have the advantage of withdrawing the amount during certain specific situations:
- Sudden termination of services
- Retirement owing to permanent disability
- Migration due to employment opportunities abroad
Gratuity: This is a contribution made by the employer towards an employee’s salary as a sign of his/her gratitude towards the services offered by the employee. This is paid at the time of his/her retirement/superannuation, retrenchment, migration due to better employment opportunities or voluntary retirement. However, an employee has to complete at least 5 years of full-time employment with the employer for his/her gratuity to attract tax benefits under Section 10(10) of the Income Tax Act, 1961. Gratuity is a percentage of an employee’s basic salary, generally 4.81%.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Jhasolutions is not liable for any decision arising out of the use of this information.
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