CTC is never equal to the take-home pay received at the end of the month.
Instead, CTC is like the inflated lays chip packet. When you open it, you are always disappointed seeing your in-hand salary. So let’s discuss the components of CTC so that you can plan your financials better.
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Buckle up, here we go!
What is CTC?
Cost to Company (CTC) is the total amount spent by the company on an employee, whether directly or indirectly. It includes various components like basic pay, provident fund, allowances, etc.
Companies also add joining bonuses, gratuities, and stock compensation in the CTC.
As there is no rule per se for the structure of CTC, each company has a different CTC structure.
In general, this is how a common CTC structure would look like. Some companies add more components like joining bonuses, training expenses, etc.
Adding the basic salary with allowance gives your gross salary. And if you subtract the EPF contribution and tax from the gross salary, you will know your in-hand salary. You can also use this calculator.
Now that you got an overview of CTC. Let’s understand the components like basic pay, gratuity, etc. more clearly.
Components of CTC
1. Basic pay
The basic salary is the fixed component of the salary, excluding any benefits and privileges you receive. It can vary depending on your job location, industry and designation.
Basic pay accounts for around 40-60% of the CTC and is fully taxable. Therefore, if the basic salary is too high, it will increase your tax and PF deductions.
Companies provide an allowance to you for meeting their service requirements. They provide allowances in addition to the basic salary, and it varies from company to company.
House rent allowance (HRA) is the most basic allowance. You can claim tax deductions on the HRA. Companies also provide leave travel allowance, food allowance, fuel allowance, etc.
3. Gross salary
Adding the basic pay and allowances gives you the gross salary amount. This gives a somewhat clear idea of how much your take-home pay will be before calculating your tax, employee provident fund contribution, etc. The bonuses, holiday pay, and overtime pay are also included in the gross salary.
4. Employee provident fund (EPF)
A Provident fund is an investment by you and your employer each month. This lump sum amount will act as your retirement corpus.
The amount that goes into PF each month as a contribution depends on the basic pay amount. 12% of the basic salary is contributed from both sides. If your basic pay is ₹20k, your PF contribution will be ₹2.4k, and your employers’ contribution will also be ₹2.4k.
The contribution made by you towards the EPF is available for a deduction under Section 80C of the Income Tax Act, 1961.
Companies provide group or individual life and health insurance policies to promote the health and well-being of their employees. They deduct a small amount from the CTC every month and use it towards the payment of the premium.
Gratuity is a lump sum amount paid to you by the company when you complete 5 years of service. As the name suggests, it is the amount paid as gratitude for your dedication and hard work.
Even though you will receive this amount only after 5 years of service, the company keeps showing the annual amount every year in your CTC. This inflates the CTC. You won’t receive any gratuity if you leave the company before 5 years.
7. Stock compensation
If you work in any startup or giant tech company, they all offer stock compensation in the form of an employee stock ownership plan (ESOP) or restricted share units (RSU).
This compensation is time-restricted. Mostly 4 years. But still, they form a component of your CTC and inflate it further.
Whenever you receive an offer letter, it is necessary to know the importance of these components. People get excited whenever they hear someone receiving a huge CTC. But the reality is all the CTCs are inflated.
You need to see through these inflated CTC to clearly understand what you are receiving for your service.
Also, don’t forget about the tax. Don’t wait till march to plan your investments and taxes.
If you have invested in life and health insurance, learn about all the tax benefits offered by them, here.
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