What is CTC ?
Cost to company (CTC) is a term for total salary package of an employee , used in countries such as India and South Africa. It indicates total amount of expenses an employer (organization) spends on an employee during one year. It is calculated by adding salary to the cost of all additional benefits an employee received during service period .If an employee ‘s salary is rupees 500000 and company pays additional 50,000 for their health insurance , the CTC is rupees 550,000. Employee may not directly received the CTC amount. CTC comprises of several components such as HRA, medical insurance , provident fund etc. Basically CTC is the cost spent by the employer spend in hiring and sustaining the employee in the organization .He may not get all of it as cash in hand , some amount can be cut in the name of PF , and medical insurance etc.
For every HR and payroll professional , structuring salary in an inevitable task , Despite the significance of the task , professionals are often uniformed of the technical and the best practices of a drafting a complete and efficient salary structure.
Whether you are working in Talent Acquisition , Generalist or Payroll profile , you should know , how to make a salary structure or commonly referred to CTC structure. A competitive CTC structure in Talent Acquisition may lead an applicant to accept or reject your offer . Similarly , both generalist and payroll processing , it is critical.
Terms like CTC , Basic salary , gross salary , Allowance , reimbursement , tax deductions , provident fund, insurance etc. often create confusion . In this article we tried to define various component of a salary structure for everyone to understand easily.
What is CTC Break up?
CTC break up
COMPONENTS OF CTC
🔴 Basic salary
Basic salary is that amount that is considered as the basic amount for an individual . It is the fixed part of the compensation .
The salary components depends on the designation of the employee and the industry type.
🟡 Gross salary
Gross salary is that amount of salary that comes after adding the basic salary and allowances without substracting the taxes and other deductions . The bonuses, holiday pay , and overtime pay are also included in gross salary.
Gross salary = Basic salary + HRA + Other Allowances.
🔵 Net salary
Net salary also be called as take home salary . This amount is the amount that an employee gets after deductions like that of TDS and other deductions like PF or medical insurance as per the company policy and your agreement at the time of joining the company .
Net Salary = Basic salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax.
Allowances is that amount that is received by the employees for meeting the requirements of the service . The allowance are being provided to the employee in addition to the basic salay. It is differ from company to company.
Here are the some of the common allowance.
House Rent Allowance .(HRA)
It is the allowance given to the employee for incurring expenses related to rent of their accommodation.
Leave Travel Allowance (LTA)
It is the amount which is given by the company to an employee to cover domestic travel related expenses. It doesn’t include food , accommodation , that the employee or people travelling along with him incur.
Statutory Bonus is an additional payment to employees with the intention of motivating them under payment of Bonus Act 1965. Bonus is 8.33% of basic or 20% of basic , and it can be paid either monthly or annually.
Special Allowance .
This allowance is balancing component of the salary structure . It is usaually used as the leftover of the CTC when the rest components have been paid out.
This allowances is being given to the employees to commute from home to office. Conveyance Allowance limit is Rs . 1600 per month.
It is an allowance which is paid to the employees to handle the effect of inflation . This is mainly for government employees , pensioners and public sector employees . Other such allowance are medical allowance , special allowance and incentioves etc.
Employees are also reimbursed certain amounts like that of medical treatment , and bill relateds to office such as trips , news paper bills , or phone bills etc. This amount isn’t received as a part of salary , the employee is expected to show the expense receipts for reimbursement . There is also a maximum amount limit for each expense that the company would be liable to pay.
Employees Provident Fund (EPF)
PF is an investment done by both the employer and employee every month , the sum of this will act as the amount that he will give you . The amount that goes into PF each month as a contribution depends on the basic salary amount as 12% of basic salary is contributed from both the sides.
Employee State Insurance Corporation (ESIC)
ESIC deduction are mandatory for employees whose gross salary is less than 21000. Employee have to make a contribution of 0.75% of gross salary and employer have to make a contribution of 3.25% of gross salary.
🔴 Income Tax ✂✂✂✂✂✂✂✂
The tax levied on one’s personal income is called income tax . Usually , an employee gets his or her salary after the tax deduction by the employer . This process is called as Tax deduction at source (TDS). The deducted tax amount is paid to the government by the company.
Individual has a choice between old tax regime and new tax regime.
|Net Income||Income Tax||Health and Education Cess|
|Up to Rs. 5 Lac||Nil||Nil|
|Rs. 5,00,000 – Rs. 10,00,000||Rs. 12,500 + 20% on income above 5 lac||4% of income tax|
|Above Rs. 10,00,000||Rs. 1,12,500 + 30% on income above 10 lac||4% of income tax|
|INCOME TAX SLAB||TAX RATE|
|Upto Rs 2.5 lac||Nil|
|Rs 2.5 lac to Rs 5 lac||5% (Rs 12,500 tax rebate per section 87A)|
|Rs 5 lac to Rs 7.5 lac||10 %|
|Rs 7.5 lac to Rs. 10 lac||15 %|
|Rs 10 lac to Rs 12.5 lac||20%|
|Rs 12.5 la to Rs 15 lac||25%|
|Rs 15 lac and above||30%|
🟢 Professional Tax
Professional tax is a tax charged by the state government in order to let an individual practice a certain profession . The maximum amount payable per year is INR 2, 500. It depends on one’s monthly salary and also on the state in which one works . The professional tax levied varies from state to state in India.
In some states and union territories professional tax is not imposed, they are –
Delhi, Haryana , Rajasthan , Himachal pradesh , Jammu & Kashmir , Nagaland ,Uttar pradesh , Daman & Diu , Andaman & Nicobar etc.
The company issues a form 16 which contains the details about the salary earned by the employee and the amount of tax deducted.
The taxpayers are required to submit Form 16 to file the Income tax returns every financial year. It acts as the proof of his/her income and tax paid to the government.
Gratuity is the part of the salary that is received by an employee from the employer for thr services offered by the employee upon him or her leaving the job.
Though an employee can receive the gratuity amount only after 5 years , it will be deducted by the employer every year and hence it will get deducted from CTC.
Life insurance and health insurance
Many company provide health insurance and life insurance to their employees , the premium for which is borne by the employer and is included in CTC. Hence it has to be deducted while calculating your take home salary.
Deductions are generally divided in following sections.
|80C||Basic deductions from total income||1,50,000|
|80 TTA||Interest from deposits||Rs. 10,000 on interest, available to an individual and HUF, deduction allowed on interest earned from a savings account with a bank|
|80 G||Donations to charity||50% of the donation made is allowed to be deducted from the taxable income. However, if the amount is more than 10% of the gross total income, the excess will be ignored.|
|80 E||Educational loan||deduction allowed on total EMI part, no limit|
|80 EE||Home loan interest||Allowed on interest paid on home loan up to maximum Rs 50,000 per financial year.|
|80 D||Medical insurance premium||For self and family- Rs 25,000, For self and family and parents- Rs. 55,000, For self and family and senior citizen parents- Rs. 80000|
A CASE STUDY
Let us take an example to understand how to calculate take-home salary:
Rana’s CTC is Rs. 16,00,000. Other salary components of her salary structure are mentioned below:
|SALARY COMPONENTS||AMOUNT (ANNUAL)||AMOUNT (MONTHLY)|
|Sec 80C Investment||1,00,000||8,333|
|Leave Travel Allowance||20,000||1,666|
🟧It is upto Rana to decide how much he wants to invest and claim under section 80c . The maximum deduction possible is 1,50,000. EPF amount also comes under section 80c.
We have assumed that Rana pays INR 30,000 per month as his rent
DA is assumed to be zero because Rana is a private sector employee.
Step 1: Calculating gross salary
Gross Salary = CTC – (EPF + Gratuity)
Gross Salary = 16,00,000 – (21,600 + 23,076)
Gross Salary = INR 15,55,324
Step 2 : Calculating taxable income
At First, calculate the HRA deduction :
HRA that you can claim = Minimum of (Actual HRA , Rent paid – 10% of basic , 50% of basic for metro city)
=Minimum(3,20,000, 3,60,000 – 10% OF 6,40,000, 50% of 6,40,000)
=Minimum (3,20,000, 2,96,000,3,20,000)
Taxable Income = Gross Salary – section 80 c deduction – standard deduction – HRA – Professional tax
Taxable Income = 15,55,324 – 1,000,00 – 50,000 – 2,96,000 – 2,400
TAXABLE INCOME =11,06,924
Step : 3 Calculate Income Tax
Income Tax =112500 + 30% of (Taxable Income – 1000000)
Income Tax =112500 + 30% of( 14,02,924 – 1000000)
Income Tax = 112500 + 30% of 402,924
Income Tax =112500 + 1,20,877
Income Tax = 2,, 33, 377
Cess = 4% of Income Tax
Net Tax = 9,333.76 + 2, 33,377 = 2,42,710.76
Step 4 : Calculating in- hand / take home salary .
Take Home Salary = Gross Salary – ( Income Tax + Professional Tax )
Take Home Salary = 15,55 ,324 – (2,42, 710.76 + 2,400 )
Take Home Salary (ANNUAL) = 13, 09,613.76
Take Home Salary (MONTHLY) = 1,09,134.48
CTC CALCULATOR 👆
What is the ideal salary structure ?
The following table shows a ideal salary structure , we have put together a table of common components for a salary structure and also added recommended amounts to each components to build an ideal salary structure.
|1||Basic||40- 45% of CTC|
|2||HRA||50% of Basic|
|3||Bonus||8.33% of Basic|
|4||LTA||8.33% of Basic (optional)|
|5||Books and Periodicals||Fixed Amount (As per company policy)|
|6||Mobile Allowance||Fixed Amount (As per company policy)|
|7||Other Allowance||Balancing Figure|
|8||Gross Salary||SUM of all Above ( A )|
|9||ESIC||0.75 % of Gross Salary|
|10||Mediclaim||Fixed Amount (As per company policy)|
|11||Employee PF||12% of Basic|
|12||Professional Tax||As per State wise Slabs|
|13||Total Deduction||SUM of all Above ( B )|
|14||Net Salary||( A ) – ( B )|
|15||Employer ESIC||3.25% of Gross Salary|
|16||Employer PF||13% of Basic|
|17||Gratuity||4.81% of Basic|
|18||Employer Deduction||SUM of Above ( C )|
|19||Monthly CTC||Gross + ( C )|
|20||Annual CTC||Monthly CTC * 12|
Thanks For Reading.
Rupa Banerjee – PAYROLL EDITOR.
Email – email@example.com