Understanding CTC and your actual salary

Last updated on: October 18, 2010 09:20 IST

Ramya Ramchandran, Investmentyogi

Whether you are joining your first job or changing jobs, it is important to understand the
difference between cost to company (CTC) and take home salary. It will help you in negotiate
better with the HR and in structuring your salary.

One of the most commonly used terms by companies, yet least understood by its employees is
'cost to company' or CTC. The CTC, as quoted by employers and the take home pay are two
different amounts.

Also salary hikes in the form of an increased CTC does not necessarily increase the monthly
salary. So what exactly is CTC and as an employee what all are you entitled for?

This article aims to clarify the confusion that often arise in employees' minds when it comes to
salary structures.

Demystifying cost to company

 Ravi, a fresh software graduate, joined a top
notch IT company. For his first job, he was extremely happy with the total CTC of Rs 6,00,000.

On the basis of this CTC, Ravi made lavish plans to spend his first month's salary. Expensive
gifts for family, a swanky new bike and the latest mobile phone. But when he got his first salary,
he realised some of his plans had to wait.

His take home salary was nowhere close to his estimation. He approached his HR, who then
explained the breakup of his CTC, which he had just glanced over at the time of joining.

Here's what his HR manager explained to him:

The cost to company refers to the total expenditure a company would have to incur to employ
you.

It includes monetary and non-monetary benefits, such as monthly pay, training costs,
accommodation, telephone, medical reimbursements or other expenses, borne by the company to
keep you employed. The total CTC need not be the actual salary in hand at the end of the month.

It is simply a sum of various components put together.

Components of CTC
 Companies offer various attractive
components in the CTC to retain and boost the morale of the employees. Whereas some salary
components are fully taxable some are fully tax-exempt. The composition of your CTC and a
few of its components could be grouped as below.

1. Fixed salary

This is the major part of your CTC and forms part of your monthly take home. It commonly
consists of the following:

Basic salary: The actual pay you receive for rendering your services to the company. This is a
taxable amount.

Dearness allowance: A taxable amount, this is paid to compensate for the rising cost of living.

House rent allowance (or HRA): Paid to meet expenses of renting a house. The least of the
following is exempt from tax.

Actual HRA received:

• 50 per cent of salary (basic + DA) if residing in a metropolitan city, or else 40 per cent
• The amount by which rent exceeds 1/10th of salary (basic + DA)

Conveyance allowance: Paid for daily commute expenses. Up to an amount of Rs 800 per
month is exempt from tax.
2. Reimbursements

This is the part of your CTC, paid as

reimbursements through billed claims.

Meal coupons: Many companies provide their employees with subsidised meal coupons in their
cafeterias. Such costs incurred by companies in the form of subsidies are included in the CTC.
Meal coupons are tax exempt provided it is not in the form of cash.

Mobile/Telephone bills: Telephone or mobile expenditure up to a certain limit is reimbursed by

many companies through a billed claim, and is a taxable amount.

Medical reimbursements: Paid either monthly or yearly, for medicines and medical treatment.
The entire amount is taxable. However, up to Rs 15,000 could be tax exempt, if bills are
produced.

3. Retirement benefits
This is available to you only on retirement or resignation.
These include:

Provident fund: Employers contribute an amount equal 12 per cent to the provident fund
account. This employer's contribution though received only on retirement or resignation, is an
expense incurred by the company every month and thus is included in your CTC.

Gratuity: Companies manage gratuity through a fund maintained by an insurance company. The
payment towards the gratuity annually is sometimes shown in CTC.

4. Other benefits and perks

Leave travel allowance: It is the cost of travel anywhere in India for employees on leave. Tax
exemption if allowed twice in a block of four calendar years.

Medical allowance: Some companies offer medical care through health facilities for employees
and their families. The cost of providing this benefit to the employee could also form part of
CTC.

Contribution to insurance and pension: Premiums paid by companies on behalf of employees

for health, life insurance and Employees Pension Scheme, could form a part of the CTC.

Miscellaneous benefits: Other perks which companies include under CTC could be electricity,
servant, furnishings, credit cards and housing.

Bonus: This is the benefit paid on satisfactory work performance for employee motivation.
Though this amount is not assured to the employee, most companies include the maximum
amount that can be paid as bonus, to the CTC. The two types of bonuses that are normally paid
out are:

1. Fixed annual bonus: Paid on the basis of employee performance, either monthly or in most
cases annually, it is a fully taxable amount.

2. Productivity linked variable bonus: Complete bonus amount is paid only on 100 per cent
achievement of target, nevertheless it still is included as part of your CTC.

Lessons learnt
Each company too has its own way of calculating the cost to company. Let us revisit Ravi's
case.

Ravi realised, that an attractive CTC does not necessarily indicate a heavy monthly take home.
Benefits like training and development, whether undertaken by him or not was still considered
part of his CTC. Here is what one should keep in mind:

One must take time to find out what the actual benefits are by asking for the break-up of the CTC
so as to know the entitlement.

If you are just joining the company, try to negotiate with the HR as to opting out of some
facilities in exchange for increasing the take home.

Understand the expenditure limits and tax angle of perks and benefits, and use them smartly.