by CTC or Cost to Company is the total amount that a company spends (directly or indirectly) on an employee. It refers to the total salary package of the employee. CTC is inclusive of monthly components such as basic pay, various allowances, reimbursements, etc. and annual components such as gratuity, annual variable pay, annual bonus, etc.
CTC is never equal to the amount of take-home salary of the employee. There are many components in the CTC that one does not receive as part of take-home salary.
CTC = Gross Salary + PF + Gratuity
Basic salary
Basic salary is the base income of an individual. It is a fixed part of one’s compensation package.
A basic salary depends on the employee’s designation and also the industry in which the employee works.
Gross salary
Gross salary is the amount calculated by adding up one’s basic salary and allowances, before deduction of taxes and other deductions. It includes bonuses, over-time pay, holiday pay, and other differentials.
Gross Salary = Basic Salary + HRA + Other Allowances
Net salary or take-home salary
Net salary or take-home salary is obtained after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax
Allowances
An allowance is an amount received by the employee for meeting service requirements. Allowances are provided in addition to the basic salary and vary from company to company. Some common types of allowances are discussed below:
- HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation.
- Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel.
- Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.
- Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. It is applicable to government employees, public sector employees, and pensioners only.
- Other such allowances are the special allowance, medical allowance, incentives, etc.
Reimbursements
Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills, etc. The amount is not received in the salary, but on submission of the bills, reimbursement is given. Generally, there is an upper limit for every category of reimbursement.
Employer Provident fund/EPF or Provident Fund
Provident fund is an investment both by the employer and the employee each month, the lump sum amount of which acts as an employee’s retirement benefits scheme.
