In India, there are Lakhs of professional workforce who are employed in a big firm or small one. These are known as “salaried employees” who earn different amount of money depending upon their job profile, skill levels, and experience.
However, chances are quite high that these salaried employees are not aware of the different aspects that constitute their “salary.”
If you are one of those, then here is a presentation that looks in detail into the various aspects of your “Salary.” Here, we talk about the difference between Gross Salary and Net Salary, Cost to Company.
It is important for you to know the different aspects of your salary so that you have a clear understanding about net salary, gross salary, and cost to the company. Generally, it’s a plain confusion for the ones who join the professional world for the first time. They simply have no idea whatsoever about net salary, gross salary, or cost to company.
Now, it’s time to shed confusion about the various aspects of your salary. The post describes in length about Gross Salary, Net Salary, Take-Home Salary, and Cost to Company, and also shows the difference between them.
So, let’s begin and learn the various aspects of “salary.”
A person is known as an Employee when he or she holds a job and works for someone else or company. The Employer is the person or company where he/she works.
The money that is received in return for the services rendered by the person is known as Salary, Income, or Wage.
What is Salary?
The money that is paid by an employer to its employee under Employer-Employee relationship is termed as Salary. However, the income of a freelancer or a person who works for an organization on a contract basis is not treated as salary. In such cases, income is treated as income from business and profession.
Actually, the word salary comes from Latin salrium meaning pertaining to salt. It was first used around 1350-1400. In those days, the salt was considered as a prized and valuable commodity.
It was the money that was given to Roman soldiers for buying salt. Phrases like the salt of the earth or worth your salt go on to show the high value of salt.
Constituents of a “Salary”
Basic Salary: It is the very basis and core of salary. Usually, other components of salary are calculated based on this amount. Basic salary is the fixed part of one’s compensation structure.
The basic salary depends upon the grade of the employee that he/she holds in the company’s hierarchy or structure. It is different for different types of industries. Any increment that an employee gets in the salary is expressed in terms of percentage of Basic salary.
Allowance: It is the amount paid to the employee to meet certain service requirements such as House Rent Allowance (HRA), Dearness Allowance (DA), Lunch Allowance, Leave Travel Assistance (LTA), Conveyance Allowance, City Compensatory Allowance, Children’s Education Allowance, etc. Allowances can be non-taxable, partly taxable, or fully taxable.
Perquisite: These are the benefits provided to an employee free of cost or at a concessional rate. It may include amenities such as Rent free unfurnished house, Rent free furnished house, Reimbursement of Gas, Motor Car facility, Electricity & Water, Reimbursement of medical bills, Domestic Servant facility, Club facility, Reimbursement of telephone bills, Reimbursement of Hospital bills, and so on.
Perquisites are non-cash components and so cannot be taxed directly. However, Income Tax Laws in India attach a certain value to these components and levy tax on them. The calculation of these values differs from category to category.
Moreover, IT Department has made it clear that only those benefits that are used for personal purposes will be regarded as perquisites.
Deductions: Two types of deductions are done from salary.
- Compulsory Deduction which includes Provident Fund, Professional Tax, Income Tax.
- Optional Deduction like recovery for loan or advances if taken, voluntary contribution to P.F., etc.
Provident Fund Contribution
Provident Fund Contribution or EPF takes the form of the employer’s contribution and employee’s contribution. Typically, it is 12 percent of the basic salary. The contribution is directly deposited in Provident Fund (PF) account and is paid to the employee upon his retirement from the company or in case if he/she resigns.
In case of employee’s contribution to PF, the amount is deducted from the monthly salary of the employee and deposited in his PF account.
What is Cost To Company (CTC)?
The Cost to Company which is popularly known as CTC is the cost incurred by a company when hiring an employee. In addition to the basic salary, CTC also includes a number of other elements such as House Rent Allowance, Medical Insurance, Provident Fund (PF), and a number of other allowances, as well.
It is cumulative of basic salary and other allowances that are entitled to an employee. Allowances such as free meals or meal coupons, cab service to-and-fro office, subsidized loans, are all combined together to form the entire Cost to Company.
In simple terms, Cost to Company is the spending incurred by a company to sustain the services of an employee. It is the total cost that a company would incur on an employee in a year. It includes all monetary as well as non-monetary amounts that are spent on an employee.
Suppose Mr. X is hired by a company at a CTC of Rs.4,00,000.
Here’s the breakdown of his yearly income as illustrated below:
Basic Salary: Rs.2,60,000
Medical Expenses: Rs.14,000
EPF Contributions: Rs.20,600
Special Allowance: Rs.17,874
Components of CTC
Cost to Company (CTC) includes a number of elements.
Below, we have done a tabular representation showing all the benefits and contributions that constitute a CTC.
Basically, CTC is the sum total of Direct Benefits ( a sum that is paid to an employee on a yearly basis), Indirect Benefits ( a sum that is paid by the employer on behalf of the employee), Saving Contributions (saving schemes that an employee is entitled to).
So, Cost To Company (CTC) = Direct Benefits + Indirect Benefits + Saving Contributions
Here’s we list out the components of CTC.
- Basic Salary
- House Rent Allowance (HRA)
- Dearness Allowance (DA)
- Medical Allowance
- Vehicle Allowance
- Conveyance Allowance
- Leave Travel Allowance (LTA)
- Telephone/Mobile Allowance
- City Compensatory Allowance
- Special Allowance
- Incentives or bonuses
- Interest-free loans
- Company Leased Accommodation
- Food Coupons/Subsidized Meals
- Medical/Life Insurance Premiums paid by employer
- Income Tax Savings
- Office Space Rent
- Superannuation benefits
- Employer Provident Fund
Here, we give a short overview of the different elements of a CTC:
These are paid to the employees on a monthly basis and form part of their take-home subject to government regulations:
Basic Salary: Unlike other components of CTC, the basic salary does not vary and remains constant always. In fact, the entire basic salary is given to the employees and is a constituent of their in-hand salary.
Allowances: These are part of the salary structure and help the employees to take care of their basic needs. There are various types of allowances, including:
House Rent Allowance (HRA): It is a part of CTC and is paid to the employees to take care of their accommodation needs. It is usually accompanied by tax benefits when the employee pays for accommodation each year. It is usually about 10% of the take-home salary.
Dearness Allowance: It is provided to the employees to tackle the issue of inflation. It is basically a cost of living adjustment to counter the effects of inflation on the economy.
Leave Travel Allowance (LTA): It is also a tax-exempt element of a CTC and covers the traveling expenses incurred by employees within the country. It should be noted that LTA only pays for travel expenses and does not cover expenses such as food, drinks, and the like.
Other usual allowances paid to the employees include medical allowance, vehicle allowance, mobile phone allowance, special allowances, and incentives.
These are the benefits enjoyed by the employees without having to pay for them. The company provides these benefits but go on to add their monetary value to the CTC. These are an expense for the company and so are clubbed with the CTC. Here, we list out the most common indirect benefits that may be a part of a CTC.
Interest-free loans: If a company provides interest-free loans for buying a house or a car, they go on to add the monetary value of the interest benefit to the CTC. The employees can avail car or home loans at subsidized rates. However, the difference between the market and subsidized interest rates is added in their CTC.
Food Coupons / Subsidized Meals: The costs of free lunch, food coupons or subsidized meals that are offered by companies to their employees at the workplace are added in their CTC. When you dig deeper in your CTC letter, you will certainly get them listed there. However, it should be noted that free lunch benefit is mostly non-cashable even when employees opt out of eating in the cafeteria.
Company Leased Accommodation: Some of the companies offer their employees with home and go on to pay rent to the landlord directly. This benefit saves the employees from the hassles of finding a home and negotiating on rent thereon.
However, the monetary value of this benefit is added to the CTC of the employee which is the rent and the furniture cost that the company incurred on behalf of the employee.
However, it is important to take note that the benefit is not tax-free. The company leased accommodation is counted under perquisite, and one has to pay income tax on it.
Medical and Life Insurance: Many employers offer group medical and life insurance schemes to their employees, premiums for which are paid by the company (employer). However, as the premiums are paid by the employer, it comes at a cost to them and is included in the CTC of the employee. Apart from this, employees do get some tax benefits.
Free commute to office: Some employers do offer free transportation to their employees to the office. However, it is added to your CTC.
Income tax savings: There are some benefits which are tax-free for the employees but are taxable for the employer. For instance, the per diem allowances, which are subjected to FBT (Fringe Benefit Tax). It is paid by the employer but forms a part of your CTC that is never received in your pocket.
Office Space Rent: The cost of work location is added to your CTC. Suppose, a company is spending INR 8000 per month in the cubicle that is used as work location, then the yearly cost will be added to your CTC. So, INR 96000 will be included in the CTC, even though the employee will never get it.
These are the contributions done by the employer towards the long-term savings account for their employees. They belong to the employee, and they can get them in the long term. However, these contributions do not constitute a part of the monthly take-home drawn by the employees.
Superannuation benefits: These are pension-like schemes that are offered mostly by multinational companies. A fixed amount is contributed every month towards your superannuation account. It can be withdrawn by the employee when he/she retires or leaves the organization. However, in most cases, the benefit is not offered in cash form. It is usually converted to some kind of insurance policies. So, this comes out as an indirect benefit for the employees.
Employer Provident Fund Contribution: It is a part of the CTC. The employer contributes as much as 12% of the basic salary each month. The amount keeps on accumulating in the PF account of the employee. It can be withdrawn when leaving the company. It is paid out in cash on withdrawal along with interest thereupon. However, it is taxable if withdrawn before five years of continuous investment.
Gratuity: It is a part of an employee’s CTC and is added to the gratuity account on an annual basis. It comes to 4.81% of the total basic salary (yearly) of the employee. However, to get the benefit of gratuity, an employee has to serve a company for a minimum of 5 years. So, it has a time limit of 5 years attached to it. If an employee leaves the company before 5 years, he/she will not get anything from the gratuity account.
Gross Salary is deduced by subtracting employee provident fund (EPF) and gratuity from the Cost to Company. Simply put, Gross Salary is the amount paid to the employee before deducting taxes and includes bonuses, holiday pay, overtime pay, and other differentials. It can be best understood as the amount of salary paid to the employee after adding all allowances and benefits (if any) and before deducting any tax.
Let’s take an example to explain Gross Salary Calculations:
(An arbitrary salary break up is shown below)
|Description||Component of Salary (per annum)||Amount|
|Basic Salary||Basic Salary||450000|
|House Rent Allowance||85000|
Employee Provident Fund (India) which is prescribed by Ministry of Labor is an employee-benefit scheme providing for various facilities to employees such as medical assistance, insurance support, retirement, housing, and education for children.
The employer contributes at least 12% of the employee’s basic salary towards the EPF account. Further up, an employee can withdraw the full amount accrued in his or her EPF account upon retirement.
Whereas, Gratuity is the part of the employee’s payout that is paid by the employer as a token of appreciation towards the services rendered by the employee. The gratuity can be claimed by the employee at the time of retirement.
However, an employee has to serve a minimum of 5 years of continuous service in a company to claim gratuity benefits.
So, Gross Salary = Cost to Company(CTC) – Employer’s PF Contribution(EPF) – Gratuity.
Net Salary is also known as the “Take Home Salary.”
It is the salary given to the employee by the employer after deducting taxes and other deductions such as Public Provident Fund, and Professional Tax Subtraction.
So, Net Salary = Gross Salary – Income Tax – Public Provident Fund – Professional Tax
Net Salary = Direct Benefits – Deductions
Income Tax is liable on the gross salary of the employee and deducted as a source by the employer.
So, Net Salary is finalized after deducting taxes from the gross salary. It is the amount received by the employer after deducting statutory taxes. It is the actual amount which is credited to an employee’s bank account.
Herein, we have shown an example to calculate Net Salary:
|Salary Component||Amount||Taxable Amount|
|House Rent Allowance||60,000||36,000|
|PF (12% of basic salary)||26,400|
|CTC (Gross Salary + Benefit)||3,25,900|
So, Net Salary can be calculated as follows:
|Tax (10% of taxable amount)||25,600|
|EPF (12% of basic salary)||26,400|
|Net Salary (Gross Salary – Deductions)||2,42,500|
So, now we can understand why there is a huge difference between CTC and Net Salary/Take Home Salary.
CTC is the sum total of various components, and not all of them is given to an employee on a monthly basis. For example, EPF does not form a part of monthly take-home pay. Plus, there are deductions (including income tax) on the gross salary which go on to reduce Net Salary further or Take Home Salary of an employee.
To sum up,
CTC = Direct Benefits + Indirect Benefits + Saving Contributions
Gross Salary = CTC – EPF – Gratuity
Net Salary = Direct Benefits – Deductions
Net Salary = Gross Salary – Public Provident Fund – Professional Tax – Income Tax