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What is CTC / Net Salary?

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The phrase "Cost to Company" or CTC, as it is commonly known, means different figures to different people.

-For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.
-For employees, Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash.
-For the Finance Manager it is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation.

  • Recruitement Cost
  • Base salary
  • Bonuses
  • Administrative
  • Office Space
  • Technology
  • Benefits

Components of CTC

  • Salary like Basic, DA, HRA, Allowances
  • Perquisites and Reimbursements given to employees (i.e.) - bonus, incentives, reimbursement of conveyance/medical/telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc.
  • Contributions that the company makes for the employees like PF, Super Annuation, Gratuity, Medical Insurance, etc.
  • Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions 
  • Tax Benefit on Stock Option plans only.

Difference Between CTC & Take Home Salary
And for most people it is plain confusion! This confusion prevails even now amongst the older employees. Most of us do not understand that there is a big difference between the follwing.

  • CTC
  • Gross salary
  • Net salary (Take Home Salary)

Cost to company (CTC) is the total cost that an employee is incurring in a company. Gross Salary is the one which you see every month. But this is before any deduction.Net Salary is what an employee get to his/her hand after deductions.(this is the take home salary)
The relation between all three

  • Gross = CTC - Other benefits
  • Net = Gross - Deductions

While switching jobs, people end up thinking that a hike on CTC as shown on the offer letter will increase the in-hand salary, But there are various components of the CTC that affect your in-hand salary.Some of these components inflate your CTC but you do not get them as a part of your monthly pay.

  1. Basic Salary: Basic salary is a fixed part of your compensation structure and the complete amount becomes a part of your in-hand salary.
  2. Allowances: Apart from the basic salary, there are some allowances that your CTC will contain. Examples include HRA, conveyance allowance, leave travel allowance. Some of these allowances are tax free up to a certain limit and some of them are dependant on your actual spending.
  3. Caims: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance etc. There is a maximum limit set to these components and are paid when you submit your bills. These are usually tax free.
  4. Deductions: A major part of your CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
  5. Performance linked pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of target, but it forms a part of your CTC, fattening it up.
  6. Taxes: Taxescause further leaks in your salary.Taxes are an unavoidable evil and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter.

When you receive a good offer, consider all these components separately and understand the impact they  will have on your in-hand salary before deciding to take up that alluring offer. Also ensure that you have calculated your tax liabilities with the new income in accordance with the tax policies to figure out the amount you will receive in your pay cheque.

 

 
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