CTC – Defining Cost To Company And Take Home Salary
What is CTC – Cost To Company India
The full form of CTC is Cost To Company. It is a term, which signifies the cost that a company would incur on you as an employee.
The salary and other perquisites (benefits) that your company pays you, are actually cost for them and hence the term. This term is quite prevalent in Indian software companies while making an offer of employment.
The break up of various elements in CTC would talk about the basic salary, HRA (House rent allowance) and other such allowances.
What is Take home pay or in-hand salary?
Take home pay is what you actually receive at the end of month or salary period. The in-hand figure is calculated after deducting income tax (TDS) and other deductions as per company policies.
You can calculate your take home pay in India using this online calculator.
What all is included in a CTC?
CTC normally includes all expenses which the company would make on you as an employee. These include:
|Direct Benefits||Indirect Benefits
(Monetary value added to CTC)
(Monetary value added to CTC)
|Basic Salary||Interest free loans, if any||Superannuation benefits|
|Dearness Allowance (DA)||Food Coupons / Subsidized meals||Employer Provident fund Contribution|
|Conveyance allowance||Company Leased Accomodation||Gratuity|
|House Rent Allowance (HRA)||Medical and Life Insurance premiums paid by company|
|Medical allowance||Income tax savings|
|Leave Travel Allowance (LTA)||Office Space Rent|
|Telephone / Mobile Phone Allowance|
|Incentives or bonuses|
|Special Allowance / City Compensatory allowance etc.|
- Direct benefits:
They are paid to you monthly and form part of your take home subject to government taxes. The terms are quite self explanatory and hence I am not writing about them here.
- Indirect Benefits:
These are the benefits that you enjoy without paying for them.
Your company takes care of them but add their monetary value to your CTC. Off-course it is an expense for the company and hence, could be added to CTC.
Here is the most common benefits (also called Perquisites in technical terms) that may form part of your CTC.
- Interest free loans, if any:
If your company is providing you interest free loans for buying a car or a house or any other need, they are definitely NOT doing a charity. They usually add the monetary value of the interest benefit that you will get out of NOT paying it, to your CTC.
I have seen it in many CTC packages that are offered by banking companies like ICICI bank. They allow their employees to get car or home loans at highly subsidized rates and then add the amount equal to the difference between the market and subsidized interest rate in their CTC.
If you don’t take the loan, you won’t get this benefit, but it is anyway added to your virtual CTC. Be careful while accepting the offer letter.
NOTE: The differential amount of benefit i.e. the money you save with subsidized rate of interest is taxable. It depends on your company policy, if they bear the tax or pass it on to you, as an employee.
- Food Coupons / Subsidized meals:
Most of the big companies offer free lunch and evening snacks at workplace.
Do you think these are FREE? No way! Dig deeper in your CTC letter and you would certainly find them in the list.
This reminds me of one proverb “No lunch is FREE in this world”.
NOTE: Normally, you won’t get this amount in-hand even if you opt-out of eating in their cafeteria. This free lunch benefit is mostly non-cash-able.
- Company Leased Accommodation:
This benefit saves you from the tension of finding a home and negotiating on rent deals. Your company provides you with home and pays rent to the landlord directly.
But, it will add the monetary value of this benefit to your CTC which is normally the rent and furniture cost that it has incurred. No prizes for guessing that the benefit is NOT tax free.
Company leased accommodation is counted as a perquisite and you have to pay income taxes!
- Medical and Life Insurance premiums paid by company:
Hmm.. so you are covered under group medical and life insurance scheme taken by your employer? Sounds good as these policies give you much better and comprehensive cover over the individual ones.
But they do come at a cost to your company and that cost, obviously is included in your CTC. Since, the money is still flowing from your pocket (even though you never paid it with your hand), you do get some tax benefits. Check it out in out take home salary calculator for India.
You will never be asked to pay premium but in reality, you would have paid it!
- Free Cabs for Office commute:
You would be lured to a new job with the option of FREE transportation to office. Well, it is not free even if it is subsidized. Most employer’s would add it to your CTC.
Free or subsidized transport is still taxable either as FBT (employer pays tax) or as your income tax if the employer passes it on to you.
- Income tax savings:
Sometimes companies offer you some benefits which are tax free for you but are taxable for them.
For example, if you receive per diem allowances, they are subjected to FBT (Fringe benefit tax). It is supposed to paid by your employer and not you.
I have seen that some companies do add the value of this tax, that you as an employee would be liable to pay, if your company does not pay it. This again forms part of your CTC even though you will never receive this amount in your pocket.
FBT tax saving added to CTC is a virtual amount that you will never receive in your hand.
- Office Space Rent:
This is the most weird component, but a real one. You must have heard about FAT pay packages that people graduating from IIM (Indian Institute Of Management) or IIT (Indian Institute of technology) receive. They run into several lakhs of rupees at the fresher level itself.
If you carefully look at the break-up, most of them do include this component as well.
For example, if the company is spending INR 7000 per month on the cubicle that you would sit in at your work location, they would add the yearly cost of this in your CTC.
This simply means that INR 84,000 (12*7000) will form part of your pay package even though you will never get it!
Your work location rent is also part of FAT CTC packages.
- Interest free loans, if any:
- Saving Contributions:
These are contributions made to your long term savings account by your employer. They do not form part of your monthly take home but belong to you and you may or may not get them in long term.
- Superannuation Benefits:
These are long term pension-type schemes mostly offered by multinational companies.
A pre-defined amount is contributed every month in your superannuation account and you can withdraw it after you retire or leave the organization.
Most of the companies do not directly give you cash on separation, but do give you an option of converting them into some kind of insurance policies. So, it is an indirect benefit.
- Employer Provident fund Contribution:
This forms part of your CTC and your employer contributes about 12% of basic salary every month.
As per the law, employer is not bound to pay 12% of the actual Basic salary that you draw. The minimum limit of basic salary to calculate the employer PF contribution was set as 6500 earlier and has recently been changed to INR 15000 to the best information available at the time of updating this article.
This amount keeps accumulating in your PF account and you can withdraw it at the time of leaving the company. This is paid out as cash on withdrawal along with the accrued interest but is taxable if you withdraw it before 5 years of continuous investment.
Check out the difference between Employer PF, Employee PF (Called VPF) and PPF for clarity.
Employer PF is part of CTC but does not show up on your Salary Slip. If it NOT counted as part of your earnings and hence is not taxed.
Again, forms part of your CTC and is added to your gratuity account annually. It is paid at the rate of 4.81% of total yearly basic salary per year.
Also, this has a time limit of 5 years attached to it. If you leave the company anytime before 5 years, you will NOT get anything from your earlier year’s accumulation of this amount.
Make sure you serve a company for at least 5 years to enjoy your Gratuity.
- Superannuation Benefits:
So, as a general rule, the CTC and take home pay can be defined as:
CTC = Direct benefits + Indirect benefits + Saving Contributions
Take Home pay = Direct Benefits – Income tax – Employee PF – Other deductions, if any
Why is there a huge difference between take home salary and CTC?
You would have seen this many times that even if your package (CTC) is 6 lakhs per annum and hence monthly income INR 50,000, you only receive about INR 40-42,000 as your monthly take home pay.
This is because CTC is actually a sum total of various components as mentioned above and not all of them are given to you on monthly basis in your hand.
Some of them like Gratuity, Employer provident fund and Superannuation benefits are added to your long term savings account but do not form part of monthly take home pay.
The other reason of reduced take-home pay is the income tax that is deducted at source (called TDS) itself i.e. by your employer.
How to Evaluate CTC for real Take Home Pay?
You should evaluate your CTC or package carefully and make sure that you understand each and every element correctly.
Use Take Home Salary Calculator – India to make a decision of accepting the new job offer or not.
Do not just look at the figure of CTC as there could many components which may be misleading and may NOT form part of your monthly take home.
Let me know your thoughts and suggestions in the comments.