While negotiating your salary with a prospective employer, it is important to understand the difference between the take home salary, which is the money that you get every month, and Cost To Company or CTC Salary.
Most employers use the term CTC or “Cost to Company” as a way to define what it would cost to employ a candidate in that year. Of course, the CTC and the take home pay are different from each other, sometimes vastly so.
What is the CTC?
All of us have been there. You get a new job, with your first salary, or with a big salary bump. You’re already spending the money before you’ve earned it, thinking about the things you’re going to buy and the places you will visit etc. However, come the end of the month, the number on your salary cheque is substantially lower than what you expected it to be. Why?
The salary package you negotiated with your employer’s HR before joining is the CTC. This includes a number of direct and indirect benefits. The costs for both types of benefits are borne by your employer. And your CTC, therefore is just a sum total of all the benefits provided to you. Let’s have a look at the various types of benefits as listed in your CTC.
1) Fixed Salary – The fixed salary, along with a few other components, goes directly towards your monthly take home. It is usually the largest item in your CTC. It commonly consists of:
- Basic Salary: The actual pay you get as an employee of the company. The basic salary makes up about 45-60% of your gross salary.
- Dearness Allowance: A component intended to compensate you for the rising cost of living.
- House Rent Allowance (or HRA): Money paid towards renting a house. This usually comes to about 50% of the basic salary.
While the basic salary and DAare both taxable, when it comes to HRA, the least of the following is exempt from tax.
- Actual HRA received
- 50% of salary (basic + DA) if residing in a metropolitan city, or else 40%
- The amount by which rent exceeds 1/10th of salary (basic + DA)
2) Reimbursements – This part of the CTC must be claimed by you by furnishing bills etc.
- Meal coupons: Meal coupons, if they’re not offered as cash, are exempt from taxes up to Rs. 1100/month (or Rs.50/ meal for 22 days a month). Many companies provide them to employees as a tax saving measure.
- Mobile/Telephone Bills: You can get telephone/mobile expenditure reimbursed tax free provided they’re being primarily used for work.
- Medical Reimbursements: This can be received in lieu of bills for medical treatment or medicines. It is paid either monthly or yearly. The entire amount is taxable, unless you provide bills, in which case up to Rs. 15,000 is exempt.
- Fuel/Car Reimbursement: The maximum non-taxable reimbursement can vary from Rs 1800 to 2400 depending on the car.
3) Retirement Benefits – These can be availed when you resign from a company, or retire.
Provident Fund: Each month, your employer contributes an equal 12% of your CTC upto a maximum of Rs 780 to your provident fund, money that you will only receive upon retirement or resignation.Employees with a basic salary of over 6500 can choose to opt out of this.
Gratuity: Gratuities are usually managed by insurance companies on a company’s behalf and are paid out to employees completing atleast 5 years of continuous service. Any payments made towards these can be included in your CTC. As per Statutory Regulations this is fixed at: Last Drawn Basic x 15 / 26 days x Number of Years of Service
4) Miscellaneous Benefits –
Conveyance Allowance: Some employees also pay a conveyance allowance, which is exempt from taxes up to Rs. 1600/Month.
Medical Allowance: Many employers collaborate with health facilities to provide healthcare to their employees. The costs of these services can also be included in the CTC. This is exempt from taxes uptoRs. 1250/Month.
Leave Travel Allowance (LTA): Employees can be paid for their travel expenses when are on leave. It is generally about 1 to 2.5 times the monthly basic salary. Employees can claim the expenses as tax-free for 2 journeys performed in India while on leave in a block of 4 years. It is paid out against the submission of an LTA Claim Form.
Contribution to Insurance and Pension: These include premiums paid by companies on behalf of employees for health, life insurance and Employees Pension Scheme.
Others: Employers may pay for the electricity costs, driver costs, house-help costs, home renovation/refurnishing etc.
- Bonus: Also known as Variable Salary. There are two types of bonuses which are both taxable.
Statutory Bonus: This is calculated as 8.33% of Rs. 7000 or minimum wages, whichever is higher. Employers sometimes pay this bonus out monthly, and it gets reflected in your payslip.
Productivity Linked Variable Bonus: Paid as an incentive for meeting performance benchmarks.
Though employers don’t assure the payment of bonuses, the CTC usually includes the maximum amount that can be paid as bonus.