What is CTC? Let’s Understand Your Salary in Simple Terms

When you apply for a job and receive a call, the first thing you often want to know about is the CTC in salary. Whether you attend interviews or listen to a salary package, the term CTC is always a part of our discussions. But what is CTC, and how does it relate to gross salary and net salary? Do you know how to calculate CTC?

Let’s find out!

What is CTC?

The full form of CTC is Cost to Company. It is the total amount a company spends on an individual in a year. CTC doesn’t mean your salary for 12 months. 

CTC in salary is actually a complete figure that includes all the monetary and non-monetary benefits the company provides you. 

For example, if your CTC is 10 lakh rupees per year, it means the company is spending 10 lakh rupees on you. Now, this doesn’t mean that 10 Lakh rupees is your take-home figure.

This CTC amount will include your salary, bonuses, provident fund contributions, health insurance, and all other discussed benefits.

Structure and Key Components of CTC

CTC is made up of several parts. It is important to understand these components so you know how to calculate CTC.

This is how your salary is structured- 

Fixed Components

• Basic Salary: This is the base figure of your salary. 

It is a fixed amount that you earn before any allowances or bonuses. If your employer makes any contribution towards the provident fund and gratuity, the basic salary is often used as the base for the calculation.

• House Rent Allowance (HRA): This is given by the company to cover your rent expenses. 

It is also a tax-saving component if you live in rented accommodation and pay rent.

• Dearness Allowance (DA): This is mostly applicable to government employees. 

However, nowadays, most of the private organisations provide it too.

• Other Allowances: These include travel allowance, special allowances, medical allowance, and any fixed monthly payments apart from the basic salary.

Variable Components

• Performance Bonus: This is basically the bonus paid by your employer based on your yearly performance. This can change every year.
• Commission: This is common in sales jobs. A commission is paid based on sales generated.
• Profit Sharing: Some companies share part of their profits with employees.

Other Benefits Included in CTC

• Provident Fund (PF): The employer contributes a fixed percentage of your basic salary to your provident fund. 

PF is a retirement savings scheme where both the employee and employer contribute a fixed percentage of the salary every month. 

• Health Insurance: Most of the organisations nowadays also provide individual or family insurance benefits. 

The premium paid by the employer for your medical insurance is also part of the CTC.

Learn what is health insurance and its key benefits!

• Other Benefits: This could include meal coupons, transportation, or other benefits the company offers.

Common Deductions from CTC

While your CTC includes many benefits and contributions, some of these are deducted to calculate your actual take-home salary.

Here are some of the common deductions applicable

• Employee Provident Fund (EPF) contribution (your part).
• Professional Tax (this amount is different for every state in India).
• Income Tax deducted at source (TDS). This is based on your tax bracket.
• Any other deductions, like loan repayments or insurance premiums.

How to Calculate CTC?

The formula to calculate CTC is as follows-

CTC = Gross Salary + Employer’s Contributions + Other Benefits

Let us understand this with a simple example-

Suppose your gross salary is Rs 5,00,000 per year. Your employer contributes Rs 80,000 towards your provident fund, and you get a bonus of Rs 20,000.

Then, your CTC shall be as follows-

CTC = Rs 5,00,000 + Rs 80,000 + Rs 20,000 = Rs 6,00,000

Gross Salary Meaning

Gross salary is the total salary you earn before any deductions like taxes or provident fund are subtracted from your income. It includes your basic salary, house rent allowance (HRA), special allowances, and other earnings.

Gross salary is basically the amount shown on your salary slip before deductions are applied. It is a part of your CTC.

Here’s the simple Gross Salary formula:

Gross Salary = Basic Salary + Allowances + Bonuses + Perquisites

Here in,

• Your basic salary is the fixed part of your pay.
• The allowances can include HRA, LTA, special allowances, etc.
• Bonuses are performance/annual incentives or special bonuses given on occasions like the New Year or Diwali.
• Perquisites are benefits like a company car, phone, etc.

Net Salary Meaning

Net salary is the amount you actually receive in your bank account after all deductions. These deductions can include income tax, employee provident fund (EPF), professional tax, and any other mandatory or voluntary deductions.

Net salary is also called take-home salary because it is the actual money you can use for your expenses.

The commonly used Net Salary formula:

Net Salary = Gross Salary – Deductions. 

CTC vs Gross Salary vs Net Salary

When you receive a job offer, you start imagining how your savings account will grow and how you’ll be able to enjoy restaurant visits, fancy dinners, weekend trips, and more.

However, the amount mentioned is usually the CTC, or cost to company, which is not the same as the money you will actually take home. That’s why it is important to understand the difference between CTC, gross salary, and net salary, along with how each of them is calculated.

Difference Between CTC and Gross Salary

CTC is the total yearly cost a company spends on an employee, including gross salary, bonuses, benefits, and employer contributions like PF or insurance. 

Gross salary, on the other hand, is only what you earn before deductions. Gross salary is a part of your CTC, but CTC also covers non-cash benefits.

Difference Between Gross Salary and Net Salary

Gross salary is the total pay you earn before any deductions. It includes your basic salary, allowances, and bonuses.

Net salary, often called your take-home pay, is what’s left after deductions like income tax, PF, and professional tax. 

Term	What It Means	Includes	Excludes	How It’s Calculated
CTC (Cost to Company)	The total expense the employer spends on an employee in a year	Gross Salary + Employer’s PF contribution + Gratuity + Health insurance + Other benefits (food coupons, etc.)	Employee’s tax, PF deductions from salary	CTC = Gross Salary + Employer PF + Gratuity + Other benefits
Gross Salary	Total salary earned before deductions	Basic Salary + Allowances (HRA, LTA, Special Allowance) + Bonuses + Perquisites (company car, meal coupons)	Employer PF, taxes, employee PF, insurance	Gross Salary = Basic + Allowances + Bonuses + Perquisites
Net Salary	This is the actual amount credited to the employee’s bank account after all deductions	Gross Salary – Employee PF – Tax Deducted at Source (TDS) – Professional Tax – Other deductions	Employer’s contributions, non-monetary benefits	Net Salary = Gross Salary – (Employee PF + TDS + Other Deductions)

Conclusion

Most of us usually get excited by a high CTC figure, but it’s important to remember that it includes various benefits, allowances, and employer contributions that you won’t receive as cash in hand. 

By knowing how to calculate these components, you can set realistic expectations, plan your finances better, and make smarter career decisions.

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CTA in Salary- FAQs