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What is CTC and how is it calculated?

[] Mentioned in this article is all about CTC or cost to company and how it is calculated

CTC meaning

The Cost to Company (CTC) of an employee is the annual cost that a business pays to that person. The CTC is computed by combining the employee’s income and extra benefits, such as EPF, gratuity, home allowance, food coupons, medical insurance, travel expenses, etc. The CTC is never equal to the amount of money you get to take home.

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CTC calculation: How is it done?

The CTC comprises all monetary and non-monetary sums spent on an employee. The items listed below are included in the in-hand salary and hence are included in the CTC pay too. They are as follows: 

CTC is calculated using the following formula: 

CTC = Gross salary + Benefits*

*Benefits can be of the following types:

  • Direct benefits

Direct benefits are the sum provided monthly by the company to the employee as part of the employee’s take-home pay or net salary, which is subject to government taxes. These are: 

  • Basic salary
  • House Rent Allowance (HRA)
  • Leave Travel Allowance (LTA)
  • Telephone or mobile phone allowance
  • Vehicle allowance
  • Special allowances

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  • Indirect benefits

Indirect benefits are those that the employee gets at no cost to the company. Paying for the employee’s costs is done on their behalf by their employer, which is added to the employee’s CTC.

  • Performance linked incentives or bonus
  • Overtime payments
  • Accommodation provided by the employer
  • Utility bills such as electricity and water are paid by the employer
  • Arrears of salary
  • Meal coupons
  • Savings contributions 

Savings contribution is the amount of money an employee contributes to their CTC, for example EPF for retirement.

CTC example 

If an employee’s income is 50,000 and the employer contributes an extra 5,000 for their health insurance, the CTC is 55,000. 

What is gross salary? 

A person’s gross salary is the amount of money they get each month or year before any deductions are taken from it. All sources of income are included in gross salary, which is not limited to just the money received in cash. 

Basic pay, home rent allowance, provident fund, leave travel allowance, medical allowance, and professional tax are among the most noteworthy components of gross salary. Employees that are paid for their work are often awarded a gross salary as their CTC.

Gross salary: The various components 

  • Basic salary 

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The term “basic salary” refers to the percentage of an employee’s total compensation without any allowances or perquisites to the employee. The basic salary is not eligible for any tax exemptions or deductions. Most of the time, a person’s basic salary is less than their take-home compensation or gross compensation.

  • Perquisites

Perquisites are perks that are granted to employees with their basic salary and particular allowances, such as health insurance. It is possible to classify these as perks received by an employee as a direct consequence of their position in an organisation. These perquisites are additional monetary or non-monetary perks paid to an employee with their salary and allowances.

  • Arrears

Owing to an increase in compensation, an employee becomes eligible for back pay. An arrears payment is a sum owed to an employee as the consequence of an increase or raise in their wage.

  • House rent allowance

House rent allowance, often known as HRA, is a financial benefit provided by an employer to help cover the costs of living expenses. The housing allowance (HRA) earned by an employee may be used to cover the cost of renting a residence near their place of employment.

Gross salary: Components that are not included 

The following are a few items that are not included in the gross salary paid by an employer to an employee by the company.

  • Payment of medical bills 
  • Travel concessions
  • Leave encashment
  • Free lunches, snacks, or other refreshments.
  • Gratuity

CTC: How to make most of what is being offered?

When negotiating, make a point of attempting to boost the direct benefits component as much as you can to your advantage. Listed below are a few examples:

  • If possible, request conveyance allowances rather than a pick-up or drop-off facility, since this is tax-free.
  • Food allowance and the possibility to convert your subsidised food expenditures to it are two things you should ask for.
  • If the firm provides ESI benefits, inquire as to whether the health coverage can be converted into medical reimbursement.
  • Inquire about health insurance for your family members.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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