Cost to Company ( CTC )
What is CTC?
Cost to Company (CTC) is a term used in the companies’ Human Resource Management to describe the company’s total expenditure on employees. It is one of the crucial metrics businesses use to determine the financial impact of hiring and retaining employees. It includes not only basic salary, but also other employee benefit expenses like direct benefits, indirect benefits, savings, etc.
Basically, CTC includes all the components of the salary structure in the Indian Payroll System. Employers pay a fixed amount of money to employees known as salary.
The CTC Formula is,
CTC= Gross salary + (Direct Benefits + Indirect Benefits + Saving Contributions) or deductions
For instance, Ram’s basic salary is Rs. 20,000. The employer pays an additional Rs. 4,500 for health benefits, and the employee contributes 10% to EPF. Then the CTC is,
CTC of the employee = Rs. 20,000 + Rs. 4,500 + 10% of Rs. 20,000 = Rs. 26,500
What is included in Cost to Company (CTC) Salary?
1. Basic Salary
The initial salary excluding allowances and deductions an employee earns. It is taxable and forms 40% to 50% of CTC.
2. Dearness Allowance (DA)
The additional amount paid to cope with inflation is fully taxable.
3. Incentives and Bonuses
The amount is fully taxable and is usually the compensation paid to employees for their excellent work.
4. Conveyance Allowance
The expenses associated with transportation, accommodation and meals while traveling for business purposes.
5. House Rent Allowance (HRA)
It is a form of monthly aid to eligible tenants to cover the cost of their accommodation. According to section 10-13A of the IT Act, it is exempted from tax under a few conditions.
6. Medical Allowance
The amount a company pays an employee every month irrespective of their health status. It is often confused with medical reimbursement.
7. Leave Travel Allowance or Concession (LTA/LTC)
It covers an employee’s travel cost when they attend work-related meetings. Only the fare of rail or airplane, or bus incurred is exempt.
8. Vehicle Allowance
The commuting expenses the employees bear between the employee’s residency and office location.
9. Telephone and Mobile Allowance
The organization’s monthly sending to meet mobile expense for business purposes.
10. Special Allowance
It is the money that does not fit under any other head or the residual factor.
Note: Neither do CTC nor Gross Salary is a take-home salary of an employee in India Payroll.
Benefits included in Cost to Company (CTC)
CTC = Direct Benefits + Indirect Benefits + Savings Contribution
It is the monthly amount payable to the employee and is taxed. They include:
- Basic salary: It is the core of an employee’s salary and significantly contributes to the received compensation.
- Dearness Allowance: It is usually an essential cost of living adjustment that helps employees tackle inflationary pressure.
- Conveyance Allowance: This is a type of reimbursement for the commutation cost between the employee’s residential and office location.
- House Rent Allowance (HRA): It is paid to an employee irrespective of their rent status and is tax-free.
- Medical Allowance: It is paid every month irrespective of the employee’s health status.
- Leave Travel Allowance: It is a type of allowance that covers an employee’s travel expenses while on vacation.
- Mobile Allowances: The company’s expenses on mobile and telephone used at the residence.
- Incentives and Bonuses: It is a type of allowance paid to an employee for their excellent work.
It is the advantage that an employee receives without paying for them. They are usually an expense to the company and not the employees. They include:
- Health Care Costs: It covers the health care benefits provided to an employee, like health insurance, at times covering the family members too.
- Taxis/Buses for Commute: This happens when the organization provides charter bus or taxis for their employees to travel to the office.
- Low-Interest Loans: Only bank employees are allowed this, a loan at a subsidized rate.
- Meals and Snacks: Most modern office spaces are decked with meal and snack outlets for the employees to enjoy.
- Office Space Rent: Few companies bear the expense of a space that the employees use.
- Company Leased Accommodation: Many companies bear the additional overheads when an employee has to relocate for the job.
It is usually the monetary value added to an employee’s CTC, such as EPF. They include:
- Gratuity Amount: It is paid at 4.81% as per the Indian law, and the employee loses the amount if he-she leaves the firm before completing 5 years tenure.
- Employer Provident Fund Contribution: 12% of the basic salary of an employee goes towards their PF account directly from the employer.
- Superannuation: A pre-defined amount is donated to an account; the employee withdraws at the time of their retirement.
How to calculate CTC, Gross and Net Salary?
It is the employee’s salary before deductions. It comprises of:
- Basic pay includes salary remunerations, salary arrears, overtime incentives, etc.
- Allowances include HRA, travel allowance, medical allowance, special allowance, etc.
- Perquisites cover fuel charges, electricity rent, sick leave, etc.
Gross Salary = Basic pay + allowances + Perquisites
It is usually a taxable amount after including deductions like PF, LIC, PPF, and Mutual fund.
It is the employee’s net pay after deducting the gross salary amount. While some deductions are mandatory, others are dependent on the organization’s policy.
Net salary = Gross salary – Income Tax (TDS) – Professional Tax – Gratuity – EPF
How to calculate CTC from basic salary:
Let’s consider a salaried professional Mr Pranay with an income of ₹10,48,000 working in Hyderabad. Here is the CTC structure calculation for him:
COMPONENT OF SALARY
|Basic Salary||Basic Salary||5,00,000|
|House Rent Allowance||2,75,000|
|Benefits vary from
company to company
(12% of Basic)
(12% of 5,00,000)
(Laptop + Mobile)
Cost to Company
|Cost to Company =
Gross Salary + Benefits
How to calculate HRA (House Rent Allowance)?
Actual HRA received from an employer:
*For those living in metro cities: 50% of (Basic salary + Dearness allowance)
Note: Please keep in mind that salary structures differ from one organisation to the next.
1.What is the difference between gross salary and Cost to Company (CTC)?
CTC stands for “Cost-to-Company”, it is the cost a company spends on hiring an employee. It includes the salary and a few other intangible expenses. While Gross Salary is the amount that is payable to the employee before deductions of taxes and after deducting EPF and gratuity from the CTC.
2. Is the Cost-to-Company (CTC) same as Take-home salary?
CTC refers to an employer’s total cost on an employee, including components like basic salary, allowances, bonus, provident fund, etc. Therefore, it is the total amount the organization spends on an employee.
On the other hand, take-home salary, is also known as net salary, the amount that an employee receives after deduction of various components like tax deductions, EPF contributions, etc. It is the actual amount that an employee receives in hand as their salary.
3. How are gross and net salaries different?
Gross salary is the total salary paid to an employee before deductions like taxes, insurance, or any other benefits. It is the total amount that the company agrees to pay the employee as a part of the employment contract.
Net Salary, also known as take-home salary, is the amount that an employer receives after the deduction of various expenses and taxes. It is the actual amount that an employee receives in hand as salary.
The difference between gross and net salaries are due to various deductions like income tax, employee provident fund (EPF) contributions, insurance premiums, etc.
4. What is Cost to Company (CTC) breakup?
CTC breakup refers to detailed breakdown of the various components that make up an employee’s CTC. It includes the following elements:
- Basic Salary: It is the monthly fixed amount paid to an employee.
- House Rent Allowance (HRA): It is usually a small percentage of the basic salary and covers the house rent of an employee.
- Conveyance Allowance: It covers the transportation charges between the workplace location and the employee’s residential location.
- Medical Allowance: It covers the medical expenditure of an employee.
- Performance Bonus: It is usually given to employees for their excellent work achievements.
- Provident Fund (PF): The retirement benefit paid to employees for their contributions to the organization.
- Gratuity: The amount paid to an employee before they leave the organization.
- Other Allowances: It includes other allowances like meal allowances, telephone allowances, special allowances, etc. These usually vary from company to company.