All you need to know about CTC Components

Introduction

Salary structure is an unavoidable duty for any HR or payroll professional yet, most professionals are unaware of the technical processes and best practices for making a managed salary structure. Terms like “Cost to Company or CTC,” “Take Home Salary,” and “Basic” in a salary breakdown are frequently seen when discussing the final salary with an employee. Employees frequently become confused by terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, etc. This article will help you understand all the CTC Components.

What is Cost To Company (CTC)?

Cost To Company (CTC) stands for the costs incurred by the business to retain the services of its employee. Basic income, House Rent Allowance (HRA), travel allowance, pension fund, provident fund, and incentives are all included in CTC (if there are any). CTC is not the same as take-home pay because it is the total payment for all direct and indirect benefits.

What are the components of Cost To Company (CTC)?

1. Basic Salary : The basic salary is the first and most important element of the CTC (Cost to Company). This sum represents the payment owed to the employees for their contributions to the company. It is deducted from their take-home pay and is subject to income tax. Generally, companies make sure that the basic pay makes up no more than 40% of the total CTC.
2. Allowances : Allowances are the second part of the CTC. Allowances are all the extras and benefits that the employer provides to the employee, both directly and indirectly. These allowances are-:

• House Rent Allowance – This amount is paid to employees who live in rental accommodation.
• Vehicle/fuel allowance – This amount is given to the employee as payment for any fuel or vehicle related expenses during the financial year.
• Dearness Allowance – Only those who work for the government, in the private sector, or who are pensioners are eligible for this dearness allowance. This allowance assists employees in dealing with the effects of inflation.
• Medical Benefits – This amount is given to the employee each month as part of income. It is regarded as a medical emergency caused by something like an accident or other circumstance.
• Internet/phone allowance – The employer facilitates this payment for the employee’s phone and internet expenses, up to a set amount.
• Conveyance Allowance – The allowance is given to an employee to compensate them for the time spent in travelling from their residence to their workplace.
• Employee Provident Fund – This is a corpus amount that the company has collected for the employee’s retirement plan.
• Others (according to internal business policies)House Rent Allowances

These are the general allowances (not compulsory) that a company offers an employee according to their policies. Cost to Company (CTC) related benefits are all governed by various income tax laws. The Income Tax Act in India specifies the procedures for taxing certain allowances. Therefore, it is important that you read up on these regulations while arranging a potential employee’s salary in order to reduce their tax burden and maximize their take-home pay.

3. Mandatory Deductions : The mandatory deductions are the third and final component of Cost to Company(CTC). Provident Fund, Professional Tax (based on the state in which the organization is located), and Income Tax (based on the employee’s tax rate) are among these deductions. So, the final salary will be : Basic + Allowances + Deductibles = CTC.

FAQ’s on CTS Components

1. What is Reimbursement?

Reimbursement is the sum of expenses given by a company to an employee who submits a claim for expenses they personally spent while executing work-related duties on behalf of the company.

2. What is Net Salary and how to calculate it?

The total salary received by an employee after all payroll deductions is known as their net salary. Net salary is calculated as – :

Net Salary = Gross salary – Income Tax – Provident Fund – Professional tax

3. What is Gross Salary?

The total amount an employee receives before any tax deductions is known as their gross salary.

4. What is a Salary Slip?

A salary slip is a report that provides all of the particular components of an employee’s salary, including their basic salary, bonuses, tax deductions, employee fund contributions, etc. The company provides this record to the employee either on paper or by email.

5. What is the difference between CTC and Gross Salary?

The CTC (Cost to the Company), is the money spent by the company when an employee is hired. It consists of various components like HRA, health insurance, PF (Provident Fund), and so forth. On the other hand, Gross Salary is the total amount an employee receives before any tax deductions in his/her salary.