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 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.
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 income 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.
- 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 definately NOT doing a charity. They ususally 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. 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. So, if you don’t take the loan, you won’t get this benefit but it is anyway added to your virtual CTC.
- 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, you would certainly find them added in your CTC. So, you won’t get this amount in hand even if you don’t opt for eating in their cafeteria!! This reminds me of one proverb “No lunch is FREE in this world”.
- Company Leased Accomodation: 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, will add the monetary value of this benefit to your CTC which is normally the rent and furniture cost that it has incurred.
- 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 is obviously is included in your CTC. You will never be asked to pay premium but in reality, you would have paid it!
- 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) and it is paid by your employer and not you. But some companies do add the value of tax that you saved and they paid in your CTC.
- 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) receive. They run into several lakhs of rupees at the fresher level itself but if you carefully look at the break-up, they do include this component.
For example, if the company is spending INR 7000 per month on the cubicle that you would sit in, they would add the yearly cost of this in your CTC. This means that INR 84,000 (12*7000) will form part of your pay package even though you will never get it!!
- Saving Contributions: They 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 predefined 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. 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 withdrawala along with the accrued interest.
- Gratuity: Again, forms part of your CTC but is added to your gratuity account annually. 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. So, make sure you serve a company for at least 5 years to enjoy your Gratuity.
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 there is 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 30-35,000 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 Superannution benefits are added to your long term savings account but do not form part of take home pay.
The other reason of reduced take-home pay is the income tax that is deducted at source itself i.e. by your employer.
Let us understand the meaning of various components here:
You should evaluate your CTC or package carefully and make sure that you understand each and every element correctly and calculate your Take Home Pay to make a decision of accepting it 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.