Many a time, the terms like CTC derive a big question mark as to its understanding. Every individual has to find their way through such a dilemma, considering he/she is working in the corporate sector. We, in order to simplify the basic salary structure, have prepared an in-depth article into the world of COST TO COMPANY.

What is CTC?

CTC or Cost to Company is the total amount that a company spends (directly or indirectly) on an employee. It refers to the total salary package of the employee. CTC is inclusive of monthly components such as basic pay, various allowances, reimbursements, etc., and annual components such as gratuity, annual variable pay, annual bonus, etc.

CTC is never equal to the amount of take-home salary of the employee. There are many components in the CTC that one does not receive as part of take-home salary.

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

Let us now discuss common CTC components:

1. Basic salary

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 organization. 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. Allowances

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
• Car Maintenance Allowance
• Medical Allowance
• Leave Travel 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 the taxation of these allowances.

3. Reimbursements

Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills, etc. The amount is not received in the salary, but on submission of the bills, reimbursement is given. Generally, there is an upper limit for every category of reimbursement.

4. EPF

EPF is an investment scheme whereby both employer and employee contribute a certain sum of money to the employee’s benefit. This amount is accessible only after the retirement of a person.

Two cases lie under this:-

– If the basic salary of the employee is less than Rs.15,000, then the employer contributes 12% of the basic pay.

– If the basic salary is more than Rs.15,000, then it is up to the discretion of the employer on how much to contribute. In this case, the employer can contribute 12% of the basic pay or 12% of 15,000 which is Rs.1800.

Thus, both parties are supposed to contribute 12% of the set amount in the Employee’s Provident Fund account. It is mandatory for Indian Registered Companies to make such contributions.

5. Gratuity

Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job.

Though an employee can receive the gratuity amount only after 5 years, it will be deducted by the employer every year and hence it will get deducted from your CTC.

6. ESOP

An employee stock ownership plan (ESOP) is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.

These plans are aimed at improving the performance of the company and increasing the value of the shares by involving stockholders, who are also the employees, in the working of the company. The ESOPs help in minimizing problems related to incentives.

Therefore, It clearly means that CTC is not only the salary, but it also includes many additional benefits. It contains all monetary and non-monetary amounts spent on an employee.