When negotiating the final salary with a prospective employee, you often come across terms like ‘Cost to Company or CTC,’ ‘Take Home Salary,’ and ‘Basic’ in their salary breakdown. While the gross figure at the end of the calculation matrix may look a lot like what your employee dreams of, the actual figure you get in hand is far from it.

To make yourself a master negotiator and ensure that you are paying your employee right, understanding how the salary system works is important. The difference between take home salary and CTC is acknowledged by all; however, few know the rationale behind this mathematics.

So, to understand the nitty-gritties as an employer, you must first learn the basics of overall salary. Next, how this total amount in the employee’s hand is finally calculated.

Difference between Cost to Company (CTC) and Take Home Salary

The total salary matrix consists of a laundry list of entries to which different amounts from the whole are apportioned. Some of these entries are – basic, taxes, house rent allowance, perks, food allowance, provident fund, etc. All these entries form a part of one large umbrella called CTC or Cost to Company.

Now, what exactly is CTC?

CTC in layman’s language is the total cost that the company bears for an employee. All the components mentioned above form one whole of salary – termed as Cost to Company (CTC). These components are monetary as well as non-monetary.

The biggest drawback about the CTC structure is that it includes many deductibles that form a part of the overall salary but do not come into the employee’s hands. This makes CTC look much more inflated. This is where the concept of take home salary comes in.

Compared to the CTC, the take home salary is the amount that is finally deposited in the employees’ bank account after all necessary deductions like PT, PF, TDS, etc.

Components of Cost to Company (CTC)

1. The first and most important part of the CTC is the basic salary. This is the amount that is payable to the employees for their services to the organisation. It forms a part of their take home salary and is subject to income tax.

Usually, employers make sure that the basic salary does not constitute more than 40% of the overall CTC.

2. The next component of the CTC is allowances. Allowances are all the perks and benefits (direct and indirect) that the company offers to the employee. These allowances are

  •  House Rent Allowance
  •  Dearness Allowance
  •  Medical Allowance
  •  Entertainment Allowance
  •  Conveyance Allowance
  •  Others (as per the company’s internal policies)

All these allowances forming a part of the CTC are subject to different income tax rules. In India, the Income Tax Act lays down the rules for taxation of these allowances. Thus while structuring a prospective employees’ salary, it is integral that you read up on these provisions to reduce employees’ tax liability and make the most of the take home salary.

3. The final part of CTC is the compulsory deductions. These deductibles are Provident Fund, Professional Tax (depending on the state where the organisation is located), and Income Tax (depending on employee’s tax bracket).

So, the total salary will now be:

CTC = Basic + Allowances + Deductibles

Calculation of Take Home Salary

The calculation from CTC to take home salary is done in several ways. Some of these methods are derived from the land and taxation rules laws, whereas others are determined through company policies and compensation structure.

Here is an example to better understand different salary components, CTC and how to calculate take home salary from CTC. 

Basic Basic 2,67,477
Allowances House Rent Allowance  1,06,991
Leave Travel Allowance 22,290
Communication Allowance 36,000
Gift 5,000
Food coupons 26,400
Other special allowance 2,71,515
Gross Salary   735,673
Benefits/Deductibles Medical Insurance 30,000
  Provident Fund (Employer’s +Employee’s share) 43,200 
Total Benefits   73,200
CTC Gross + Benefits 8,08,873

 

The row highlighted is your employee’s total CTC. From this amount, the following adjustments are made further to determine the total take home salary.

Take home salary = [CTCTDS – professional tax – provident fund contribution – any other expenses] 

Takeaway

Negotiating salary is one of the toughest bones of contentions between an employer and employee. While as an employer, you may seek to get the best from a prospective resource at the best possible cost, you must also ensure that you’re not underpaying talent in any way or are doing any practices that can result in a possible case of exploitation.

As an employer, it is your job to take prospective employees through every entry in their salary matrix and make sure they are clear and agreed upon. 

Simplify salary calculations now

You can simplify salary calculations and avoid all the confusion by using a payroll software, like RazorpayX Payroll. 

RazorpayX Payroll automates salary calculations and timely disbursals after necessary deductions like PT, PF, TDS, etc. It eliminates manual intervention and the risk of clerical errors while executing payroll. 

The software combats compliance pain by automating payments of PF, PT, ESI & TDS, and filing their periodic returns. 

Further, employees get access to their own account, making it easy for them to download payslips and Form 16, apply for leaves, request reimbursements, etc. 

Additionally, it offers best-in-class group health insurance for employees of small businesses even if the employee count is 2. 

What are you waiting for?  

Get rid of all the ambiguous CTC calculations! Set up and automate a standard payroll process with RazorpayX Payroll, now. 

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