Cost to Company (CTC)

    Introduction

    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.

    What is the meaning of CTC?

    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.

    What are the Components of CTC?

    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. 

    • Basic Pay – It is the amount paid to employees before any reductions or increases due to overtime, bonus, and allowances.
    • Insurance – It is a method to protect people from financial loss. An individual or entity in which the company agrees to provide specified coverage in exchange for premium payments ongoing.
    • Medical allowance – It is a fixed allowance for reimbursing expenses for medical care that do not require a detailed accounting.
    • Dearness allowance – It is the amount given by the government to the employees of the private sector for the cost of living.
    • House rent allowance – It is a certain amount of money paid by an employer to cover employees’ housing costs.
    • Travel expenses – These expenses are business costs associated with transportation, lodging, and meals while traveling for the organization’s purposes.
    • Paid medical leave – It refers to a period of time in which an employee receives an income while experiencing physical illness or injury.
    • Casual leave – It is available to employees who have been unable to report to work due to unforeseen situations.
    • Employee provident fund – It is a plan for the benefit of employees where the employee and employer contribute a certain amount of money.
    • Gratuity – It is a sum of money paid over and above the agreed-upon salary as a token of appreciation for the employee’s services.

    We can say that,

    CTC = Net salary + contribution made by the employer

    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.

    How is CTC calculated?

    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.

    CTC = Gross salary + Direct benefits + indirect benefits + saving contribution

    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:

    Basic Salary500,000
    Medical Allowance55,000
    House Rent Allowance45,000
    Mobile and telephone allowance20,000
    Travel Allowance60,000
    Leave and Travel Allowance40,000
    Dearness allowance66,371
    Provident Fund Contribution84,000
    Gratuity29,629

    What is the basic salary for CTC?

    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. 

    What is the difference between Taking home/Net, and Gross Salary?

    Gross 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.

    • Basic pay covers salary remunerations, salary arrears, the incentive for overtime, bonuses, performance-based cash awards, etc.
    • Allowances include HRA, travel allowance, medical allowance, dearness allowance, special allowances, etc.
    • Perquisites are fuel charges, rent for electricity, sick leaves and accommodation, etc.
    Gross salary = Basic pay + allowances + 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 or take-home salary

    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.

    Net salary = Gross salary – Income-tax (TDS) – Professional tax – Gratuity – EPF

    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.

    Wrapping up

    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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