If you are an employee or a fresher looking for a job, you should know that your offer letter will have details of CTC-Cost to Company. As the name suggests, CTC refers to the amount that the company bears to hire an employee. CTC will have many components in its total structure; however, understanding each component is complex.
Points to remember for CTC
- CTC is not your take-home salary. As mentioned, CTC contains many components like House rent allowance, dearness allowance, other monetary and non-monetary allowances.
- Annual appraisals and hikes are usually provided based on your CTC.
- There are several components of CTC. However, the components of CTC vary from employer to employer. For instance, government employers can have a different CTC structure compared to private-sector employers.
Components of Cost to Company (CTC)
- Grade pay-The government sector usually pays grade pay to its employees. This payment is based on the seniority of the employee.
- Basic Pay-This is the main component of the CTC structure. It is a fixed component of the salary and usually comprises 40% to 50% of the total CTC. Many other CTC components like contribution to provident fund, gratuity and others are determined on the basic salary.
- Allowance-Allowance is a fixed amount provided as a part of CTC by the employer to meet a particular type of expenditure incurred by the employee. Allowances can be partially taxable, fully taxable or non-taxable depending on nature. Some allowances depend on the employee’s designation, whereas some are offered to all the employees irrespective of designation.
- Dearness Allowance– The government employers generally provide this allowance as a percentage of basic salary to meet the rise in inflation over a quarter. The % of dearness allowance depends on the inflation rate of the economy.
- HRA-HRA is known as a house rent allowance. It is provided as a part of rent expenditure incurred by the employee for residence. The HRA component offered is different for different cities, even by the same employer.HRA allowance is partially exempt as allowed under the income tax act.
- Conveyance Allowance– Allowance allowed for incurring the expenditure to travel from home to the workplace.
- Medical Allowance-This allowance is provided as a part of CTC. One can claim tax exemption against this allowance by submitting medical bills in intervals specified by the employer. Usually, the exemption for medical allowance can be claimed for the medical expenses incurred for self, spouse, children and dependent family members.
- Leave Travel Allowance-
- Some employers provide a leave travel allowance as a part of their CTC. An exemption is allowed for the travel fare subject to conditions as laid down in the act. This year the government has introduced an LTC cash voucher scheme that allows you to claim the benefit of LTA on purchasing goods or services as specified.
- Training, telephone, books and periodicals allowances- Many companies provide a separate portion of the CTC for incurring external training expenditures, mobile bill payments and purchase of books/periodicals.
- Special allowances-
- Some employers offer special allowances to adjust the amount of total CTC given to employees. This is a fully taxable allowance.
- Provident Fund-A portion of the salary gets deposited in the PF account of the employee. Employer and employee together contribute to the contribution. The contribution to the PF account is 12 per cent of the basic pay.
The CTC structure can contain other allowances as per the employer’s policy, which may include children education or hostel allowance, uniform allowance, daily allowance, tour allowance, food coupons etc. An employee can claim the exemption for such allowances by submitting the bills or proofs of expenditure to the employer before the end of the financial year to claim exemption.
Some employers also include variable compensation like performance bonus, a percentage of commission on sales etc., as a part of the total salary.
Calculation of Cost to Company
Cost to the company is calculated as the total of the employee’s direct and indirect benefits. Thus CTC will include Basic pay, all allowances/perquisites and provident fund contribution.
Whereas take-home salary will be calculated as total CTC less contribution to provident fund, gratuity (if it is a part of CTC already), any group insurance premium deduction, other applicable deductions and deduction of income tax. null
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