Cost To Company - CTC

What is CTC in Salary?

CTC (Cost to Company) in salary refers to the total amount a company spends on an employee annually. CTC does not signify the employee’s take home as there are multiple deductions included. However, the deduction amount varies depending on the particular organization’s policies. It constitutes components such as basic salary, house rent allowance, special allowance, bonus/performance incentives. The standard deductions will include employee provident funds, professional tax and income taxes, or TDS deductions. However, there can be more deductions depending on the company’s individual policy.

What does CTC include?

Here are the multiple components included in a CTC, listed below are the detailed explanations of each inclusion-

• Basic Salary

This is the fixed and fundamental portion of an employee’s salary; it can be the base amount for the rest of the salary components like HRA, Provident Fund, and Gratuity. The basic salary amount can be categorized as a significant percentage of the total salary and shall always remain constant, until there is a hike. The basic salary is taxable and impactful in calculating employee’s tax configuration and even the final take home.

• Dearness Allowance (DA)

This allowance is provided only to government employees and selected/limited private-sector employees to facilitate them in coping with inflation. Dearness allowance is calculated as a percentage of basic salary and is updated or revised periodically basis cost-of-living index. This ensures that the employees receiving DA maintain a certain standard of living amongst the high prices and inflation.

• Incentives and Bonuses

Incentives and Bonuses can be classified as additional payments given to the employees as rewards for achieving performance targets and contributing generously to the company’s growth. This additional income can be paid periodically, like monthly, quarterly, or annually depending on the organization’s distinctive policies. They can either be a fixed amount or can be performance-based variables with a capping of a certain preset amount.

• Conveyance Allowance

This allowance is provided to cater to the entire cost of commuting between home and workplace. As per the taxation laws, this portion was exempted from the taxes, but as of now, it is included as a component in standard deduction. A few organizations still utilize this component in forming the CTC/ cumulative salary structure for organizational convenience.

• House Rent Allowance (HRA)

HRA is the component offered to employees to meet their residential rental expenses. It is calculated on the basis of basic salary and can be different for every employee depending on the place of residence. For instance, if an employee resides in tier one city, they might have more HRA allowance compared to the ones residing in tier two cities. The tax exemption depends on the rent-paid, location, and the cumulative salary structure.

• Medical Allowance

This allowance is a fixed amount provided to the employees for catering to their general medical expenses. In most organizations, this allowance is completely covered under taxable slab. However, a few companies might go for reimbursing medical bills under a separate medical policy which might be tax exempted later. This constructively covers employee’s regular health checkups, medical treatments, etc.

• Leave and Travel Allowance/Concession (LTA/LTC)

LTA/LTC is provided to employees for encouraging them to travel with their families, mostly within India. This allowance ensures that the amount becomes tax free only when the employee chooses to travel and submit required travel proof. However, the exemption applies only to the travel cost and excludes any exemption made on accommodation or meals. If the employees choose not to utilize the amount, it will then become taxable.  

• Vehicle Allowance

Vehicle allowance is given to employees who utilize their personal vehicles for official work or wish to utilize transportation as a part of their job. It caters expenses like fuel expenses, maintenance cost, or general usage of personal vehicles. Certain organizations offer complete reimbursement instead of a fixed allowance; however, it has dependencies on the actual usage.  

• Special Allowance

This allowance is a flexible component which includes salary structure for balancing the total CTS after assigning and bifurcating major components such as basic salary and HRA. It is not tax exempted and can be categorized as the second largest portion of the take-home salary. Organizations utilize special allowance for structuring compensation in a way that fits perfectly in internal policies or can be categorized under market benchmarks.

How to Calculate CTC?

CTC Calculating Formula:  

CTC = Gross Salary + Employer Contributions+ Perks/Benefits.

For instance,  

In this case, employer contributions can be PF (12% of basic)- 3600, and gratuity (4.81% of basic)- 1,443. The benefits include insurance of 1000 a month.  

According to this, the annual package of the employee would be 9,12,516.

What is the CTC Calculation for 6 LPA Package? 

Typically, a simple CTC breakdown of a 6LPA package is as follows-  

Assuming-  

• Basic is 40% of CTC

• HRA is 50% of basic 

• Employer PF is 12% of basic  

• Gratuity is 4.81% of basic  

If the CTC is 6 LPA-  

• Basic- 2,40,000 

• HRA- 1,20,000 

• Special Allowance- 1,92,000 

• Gross Income- 5,52,000 

Employer Contribution (Annual)- 

• Employer PF- 28,800 

• Gratuity- 11,544 

• Total Employer Contribution- 40,344 

So, the total CTC = A+B= 5,52,000 + 40,344= 5,92,344. Rest amount can be calculated under bonus or benefits component. Here, 7,656 will be added in bonus, and the CTC of 6,00,000 LPA will be completed.