CTC vs Take-Home: Simplifying Salary Components
1 Sep, 2023
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As attractive as the “compensation” looks on the offer letter, for most of us, it is overwhelming to make sense of the corporate compensation structures. Terms like CTC, gross salary, take-home salary, and many allowances, may be confusing for anyone. It is important to understand the terminologies of the salary structures to understand how much you are actually getting paid.
To make things easy, and also to understand how much you actually make, take a look at this example:
“Say you booked a hotel room for a night. Apart from accommodation (take-home salary), you are given many benefits like complimentary breakfast, room service, and toiletries. Assume that the total fare is your CTC. The accommodation is your take-home salary and the benefits are your allowances, perquisites, PF, gratuity, etc. The CTC (total fare in this example), comprised some direct and indirect benefits.)”
CTC (Cost to company)
Cost to company (CTC) is the total amount spent on an employee including tangible and intangible benefits. It is the total cost the company bears in keeping the employee in the firm. CTC includes but is not limited to:
- Basic Pay
- Dearness Allowance
- House Rent Allowance
- Conveyance Allowance
- Bonus
- Leave Travel Allowance
- Health care benefits
- Variable Pay
Savings contributions like PF and gratuity also form part of the CTC. We will take an in-depth look at the components of CTC.
Gross Salary
Gross Salary is part of the salary that includes all direct benefits. It includes the saving contribution, and deductions (EPF and gratuity) but doesn't include taxes, insurance, and other benefits. It is ideally the monetary component of the CTC that includes the base pay, allowances, and reimbursements.
Net Salary/Take-home Salary
Take-home salary is the amount the employee receives in their bank accounts after all tax deductions from the gross salary.
Direct components of CTC
As mentioned earlier in the article, CTC is made up of tangible and intangible benefits. The direct benefits are:
Basic Salary
The remuneration fixed by an employer in exchange for the work performed by the employee is called the Basic salary. It is fixed at the discretion of the employer. Ideally, basic pay stands at or more than 40% of CTC.
Dearness Allowance
The employer pays an amount to the employee to combat inflation and for the cost-of-living expenses of the employee. This is called the Dearness Allowance and it varies according to the location of the job.
House Rent Allowance
The amount paid towards rent or accommodation expenses of the employee is called House Rent Allowance. As an important component in the salary structure, it can help save your taxes
Conveyance Allowance
The commutation cost from home to work is given by the employer in the salary and is called the conveyance allowance.
Leave Travel Allowance
Leave travel allowance or LTA is the yearly benefit given to employees for their travels. The actual expenses incurred by the employee can be exempted based on certain conditions.
Indirect Components of CTC
Indirect components of CTC are office space rent, meals, and snacks, office cab costs, health care costs, etc. These benefits are provided to the employees by the employer indirectly.
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Can the same job offer a different salary to two different employees?
A company considers a lot of factors to determine employees’ remuneration such as experience, job location, qualification, budget availability, competitors’ pay range, etc. Hence it is possible to have the same job paying differently to different employees.
How can CTC restructuring help with employee retention?
Since the payout is one of the crucial factors of motivation for employee retention, focusing on increasing the take-home component of the salary and reducing employees’ tax burden is important for companies. This can be done by fixing the base wages or basic pay since most of the salary components are the percentage of the basic pay. Apart from that, companies can train employees on making use of deductions
Why is take-home salary different from CTC?
CTC includes direct benefits (like basic pay, allowances, etc), indirect benefits (like office refurbishments), and savings contributions (like PF, gratuity, etc). The difference between take-home and CTC is the impact of several deductions. It is crucial to claim deductions so for optimization of take-home salary and save taxes.
What do you mean by expected CTC?
The salary package that a candidate expects while applying for a job is called expected CTC.
How can employees do efficient salary structuring?
i) Addition of fixed allowances such as food, conveyance, mobile allowance, etc that are taxed at a lower rate.
ii) Inclusion of exempt allowances such as HRA, LTA, children's education allowance, and perquisites that gives some tax relief
iii) Availing retirement contributions (like National Pension Scheme) that also provide tax relief to some extent.
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