Cost to the Company in simple terms is the ‘Kharcha’ or the Expenses borne by the company for the employees annually which forms a part of their salary structure but acts more in sort of benefits and retirals rather than being a part of their in hand salary.
For those who have just passed out a college and joined a company, and your HR has provided a Appointment letter, with all the components like Gross salary, Net salary, Basic Salary, DA, TA and you are not able to understand anything … ok…ok… don’t you worry, get your concepts cleared and do a relax working.
Lets start with Gross Salary: Meaning of Gross says it all… Gross means Inflated or Bloat.. i.e. salary which is bigger and has all the allowances, reimbursement by the company, included in it in which taxes are NOT deducted and other benefits given by the company NOT included in it. So, obviously when some compulsory taxes are deducted then, your take home salary is less then gross salary.
Gross Salary = In hand salary + reimbursements by the company+allowances with no mention of DEDUCTION (The Monster)
Suppose company says, you have been employed at Rs. 12,000 per month and you feel happy that you will be getting Rs. 12,000 credited in your account… Be happy only for the amount you are paid after deductions… your In hand salary after PT deduction, ESIC deduction, PF Deduction or any other … ( varies from company to company) will be surely less than Rs. 12,000.
If the company says your CTC is Rs. 15000 per month!!! Good One!!! CTC as you know includes benefits, retirals and all the expenses borne by the company for the employee.. say medical insurance, employer’s PF contribution, liability towards gratuity, ESIC (if applicable) – employer’s share etc.. but is not your In hand salary.
So, CTC is not a monster, it is an angel which you cannot see, but receiving your fruit from it on later stages..
So, now when you receive any offer letter of the company, you have to focus or find out about gross salary, deductions that are made and the benefits which are included in CTC. (since they are meant for you only..]
So, now what do you feel, is CTC a monster or an angel??? surely an angel… right??? as it comes with a magic wand to give you some benefits and happiness which you may get it now or afterwards.. but surely you will receive it..
Let’s see an example explaining the salary. An arbitrary salary break up is given below (Note: salary structure varies from one company to another):
|Component of Salary(per annum or p.a)||Amount|
|House Rent Allowance||96,000|
Benefits vary from company to company. Example of benefits for the above employee are:
|Provident Fund (12% of Basic)||57,600 (12% of 4,80,000)|
|Cost to Company=Gross Salary + Benefits||6,75,000 + 109600=7,84,60|
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to employee .i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
The phrase “Cost to Company” or CTC, as it is commonly known, means different figures to different people.
-For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.
Components of CTC
• Salary like Basic, DA, HRA, Allowances
• Perquisites and Reimbursements given to employees (i.e.) – bonus, incentives, reimbursement of conveyance/medical/telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc.
• Contributions that the company makes for the employees like PF, Super Annuation, Gratuity, Medical Insurance, etc.
• Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions
• Tax Benefit on Stock Option plans only.
Difference Between CTC & Take Home Salary
And for most people it is plain confusion! This confusion prevails even now amongst the older employees. Most of us do not understand that there is a big difference between the follwing.
• Gross salary
• Net salary (Take Home Salary)
Cost to company (CTC) is the total cost that an employee is incurring in a company. Gross Salary is the one which you see every month. But this is before any deduction.Net Salary is what an employee get to his/her hand after deductions.(this is the take home salary)
The relation between all three
• Gross = CTC – Other benefits
• Net = Gross – Deductions
While switching jobs, people end up thinking that a hike on CTC as shown on the offer letter will increase the in-hand salary, But there are various components of the CTC that affect your in-hand salary.Some of these components inflate your CTC but you do not get them as a part of your monthly pay.
1. Basic Salary: Basic salary is a fixed part of your compensation structure and the complete amount becomes a part of your in-hand salary.
2. Allowances: Apart from the basic salary, there are some allowances that your CTC will contain. Examples include HRA, conveyance allowance, leave travel allowance. Some of these allowances are tax free up to a certain limit and some of them are dependant on your actual spending.
3. Claims: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance etc. There is a maximum limit set to these components and are paid when you submit your bills. These are usually tax free.
4. Deductions: A major part of your CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
5. Performance linked pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of target, but it forms a part of your CTC, fattening it up.
6. Taxes: Taxescause further leaks in your salary.Taxes are an unavoidable evil and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter.
Conclusion- Guys when you receive a good offer consider all these components separately and understand the impact they will have on your in-hand salary before deciding to take up that alluring offer. Also ensure that you have calculated your tax liabilities with the new income in accordance with the tax policies to figure out the amount you will receive in your pay cheque.
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