Business organizations are bound by an obligation to pay their employees a particular sum of money in return for employees’ services to the company. For the employers, this sum of money, called salary, can be described as the cost of acquiring and retaining human resources for running business operations. From the point of view of the employees, salary can be viewed as the money and/or benefits earned under the employer-employee relationship to meet their personal expenses.
Usually, the salary for all employees performing similar work in similar industries in the same region is in a particular range. They are governed by the market pay rates and the minimum permissible wages according to the laws and regulations governing the area of operations. But, it should be understood that specific skills, competency and certifications are factors that may result in difference in salary structures.
It is common knowledge that salary consists of basic pay, housing allowance, dearness allowances, and others. While some allowances are taxable, others are either fully or partially exempt. New entrants of the corporate world may be fascinated at first by the astronomical salaries that they are hired at. But they are often disappointed when their first salaries turn out to be lower than their expected calculations.
So, what makes up for this difference? It is necessary to understand that the take home salary is not what is mentioned on your appointment letters. Let us discuss some aspects of the break-up of your salary structures to be able to make out the difference between similar sounding technical terms related to salary.
What is CTC?
Cost to Company (CTC) is in fact the salary package that is offered to an employee. What most employees do not understand in their first jobs is the fact that the CTC is an indicator of the total amount of expense that an organization is incurring for an employee in a year, including all the facilities an employee is getting during the service period.
This means that the CTC is not the actual salary of an employee, but a sum total of all the costs associated with an employment contract. It signifies the cost that a company would incur on you as an employee. Quite surprisingly, a major part of CTC comprises of compulsory deductibles, including those for provident fund, medical insurance etc.
It is to be noted that the salary and other perquisites that your company pays you, actually translate to some cost for them and hence the term. So, they form a part of your compensation structure but you do not get them as a part of in-hand salary. In other words, benefits increase your CTC, but they do not increment your net salary.
What constitutes your CTC?
Your basic salary, Dearness Allowance (DA), HRA, Medical Allowance, Conveyance Allowance, Medical Allowance, Incentives and bonus all come under the direct benefits that you get from your employer. These direct benefits coupled with indirect benefits such as Interest free loans, Food Coupons, Medical and Life Insurance premiums paid by company, Income tax savings, and Company Leased Accommodation and saving contributions such as Superannuation benefits, Employer Provident fund Contribution, and gratuity form your total CTC.
As a rule of thumb, CTC = Direct benefits + Indirect benefits + Saving Contributions
What is Take Home Salary?
Take home salary is the amount of money that an individual actually receives after the employment taxes and the cost of benefits and retirement contributions are deducted. While your gross salary is the CTC minus other benefits, your net salary can be calculated by making deductions such as income tax, Social Security and Medicare taxes, contribution to provident fund and so on from your gross salary.
Your take home salary is usually the net salary unless there are some personal deductions like loan or bond repayments, in which case, it becomes even lesser than your net salary.
Take Home pay = Direct Benefits – Income tax – Employee PF – Other deductions, if any
Why is there a difference in CTC and take home salary?
A common reason for difference in the CTC and take home salary is that some portions of your CTC, such as Gratuity, Employer provident fund and Superannuation benefits are added to your long term savings account but do not add up to your monthly take home pay. The other reason of reduced take-home salary is that the income tax is deducted at source by your employer, generally referred to as Tax Deduction at Source (TDS).
So, before being taken away by some seemingly lucrative new job offer, or when considering a salary appraisal or promotion raise, employees should look at what their take home salary will be and not their plump CTCs. Employees should also ensure that they have calculated their tax liabilities with the new income in accordance with the tax policies to figure out the amount they will receive in their paychecks.
We hope this post clears the doubts around understanding the salary break-ups and jargons. All the best for exciting new job offers and pay raises!