Terms like Cost to company bring the questions to people’s mind and often leads to misunderstanding of the salary structure. Being an employee, it is critical to understand the difference between CTC, basic pay, net income, and gross salary. Employees often complain to the HR department about underpaid remuneration and salary.
Employees are still confused about CTC and gross salaries. Some working professionals understand the difference between these two terms but the majority of them have a lot of questions about them.
Let us take you on a tour of the meaning of Cost to company and how it is different from other salary types.
Cost to Company is the amount spent by the company on hiring an employee. It is the sum of salary and additional benefits that an employee gets while working within a company. It is the complete package and annualized salary of an employee offered by the employer.
To understand it thoroughly, employee costs to the company are the total sum that the employer spends on him/her. It is the amount bears by the company to sustain and hire an employee. It is the wholesome benefit that employees withdraw from the company in tangible and intangible forms. It is not fixed pay. It is the variable pay as the indirect and direct expenses of the company on its employees may change yearly. An employee doesn’t necessarily receive the CTC in cash as additional benefits are received in an intangible form.
It represents the total of Direct Benefits (such as employee yearly salary), Indirect Benefits (such as tax exemptions), and Saving Contributions (such as retirement plans or investment vehicles). It is different from net income. It also includes additional services provided to the employee as security and necessities. The benefits include bonuses, reimbursements, statutory additions, and allowances.
We can say that,
As per the above table, Mr. A’s CTC is the total of all the direct and indirect benefits amounting to rupees 900,000.
It applies to the employees who are working in the company. In case of layoffs and closing down of the organization, if an employer terminates an employee. Then in case of contractual agreement, he is entitled to receive 15 days’ salary for each month served in the company. The remuneration received is known as severance pay and is taxable.
Cost to Company is the sum of three vital components. These are direct benefits, indirect benefits, and saving contributions.
The direct benefits are the allowances paid in cash form. These are basic pay, dearness allowance, conveyance allowance, House rent allowance, leave travel allowance that is LTA, earned leaves, mobile allowances, incentives, and bonuses.
The indirect benefits include income tax savings, subsidized loans; sick leaves leased accommodation provided by the company, subsidized meals and food coupons, insurance premiums paid by the company, etc. Saving contributions include gratuity and EPF.
For example, Mr. A has applied in firm B for a vacant job position and got selected. He received a CTC of 900,000 rupees. His annual CTC breaks up looks like this:
|House Rent Allowance||45,000|
|Mobile and telephone allowance||20,000|
|Leave and Travel Allowance||40,000|
|Provident Fund Contribution||84,000|
Basic salary in CTC refers to the fixed pay received by the employee before any additional payments and deductions. It is the minimum amount of money earned by the employee. It excludes overtime pay, bonuses, allowances, and other compensatory benefits.
The basic salary is taxable. Other components in the payslip like PF, ESIC, and Gratuity are calculated based on the basic pay. The basic salary is a part of the net salary or taking a home salary.
Gross salary refers to the yearly and monthly salary given to an employee before any deductions. The components of gross salary include basic pay, allowances, and perquisites.
The components that do not include calculating gross salary in a payslip template are gratuity, free snacks and meals, leave travel allowance; medical expenses reimbursements leave encashment applicable during the retirement period.
The taxable salary of an employee in India is derived after making deductions in the gross pay amount. As per the rule of 80C, the person is liable to pay taxes on a gross salary after making deductions like PF, LIC, PPF, and Mutual fund.
Considering the above table showing the CTC of Mr. A, his gross salary would be
Gross salary of Mr. A = 900,000 – (84,000 + 29,629) = INR 786,371
Net salary refers to the employee’s net pay after applying deductions from the gross salary amount. Some deductions are mandatory, and some depend on the employer policy.
Income tax is generally TDS that is tax deducted at the source. Professional tax on earning individuals gets deducted from gross salary. The state government decides its range. PPF is a stipulated percentage of employee salary.
Considering the example of Mr. A shown above, his net salary is the difference between the gross salary and deductions of the applicable tax amount.
HR professionals often deal with the queries raised by employees regarding salaries.
HR personnel has a burden of responsibilities to accomplish. It is complex for them to take out time in monitoring payrolls and calculating year-to-date earnings.
Effective Payroll software helps you calculate earnings and distribute payouts to the employees. It saves your time and delivers robust outcomes in managing payroll responsibilities.
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