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WHAT IS CTC IN JOB? Complete Details and Benefits of CTC

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What is ctc?

CTC means a cost to Company in India. CTC package is a term often used by private sector Indian companies while making an offer of employment to show the total remuneration. The gross salary before income tax and other deduction is what is listed as cost to company salary for a period of 12 months in a financial year. The CTC package shows detailed break-up showing basic salary, house rent allowance (HRA) and other such allowances. CTC contains all monetary and non-monetary amount spent on an employ. CTC in resume is generally asked to be filled in, to help the new employer know your current total gross salary including any cash or non-cash benefits.

The CTC can include many elements in addition to salary, such as helth care, pension and allowances for housing, travel and entertainment. Tax is also deducted from the cash amount the employee receives directly. The term CTC is used by companies to more accurately reflect the incremental spend per employee the concept of direct cost from the perspective of organization.

Another way to look at CTC is:

  • All the money that would not need to be spent if the number of employees is reduced by one.
  • The indirect cost like the cost of facilities, the support teams like HR, IT, management etc. would still be incurred and hence not included in CTC.
  • The CTC should not include any component, that cannot be attributed directly to the employee.

If the company provides an annual performance based variable payout (also known as bonus or commission), this will also get included in CTC. The variable payout is usually a certain percentage of gross salary and typically varies of 5% – 30%. Since it is a performance based, the employee may be eligible for anywhere from 50% to 150% of their variable payout based on their performance of the year.

CTC= direct benefits + indirect benefits + saving contribution

Benefits of CTC

Direct benefits of CTC:

Paid to employee monthly and from part of your take home after deducting the income tax plus any additional state taxes.

Indirect benefits of CTC:

Benefits also called perquisites in legal Indian government terms that an employee enjoys without paying for them. Your company takes care of them but add their monetary value to their CTC.

  1. Food coupons and subsidized meals: many MNC employers offer free lunch and evening snacks at work place. No lunch is free in world.
  2. Medical and life insurance premiums paid by compony: group medical and life insurance policies by your employers give you much better and comprehensive cover over the individual ones. The cost is added in CTC and you can claim it for income tax rebate while filling ITR.
  3. Income tax savings: sometimes companies offers you benefits which are tax free for you, but are taxable for the companies. Example; if you receive per diem allowances, they are subjected to fringe benefit tax (FBT). It is supposed to be paid by your employer and not to you. Some companies do add the value of FBT in your CTC. You as an employee would be liable to pay, if your company does not pay it.
  4. Office space rent: you must have heard about FAT pay packages that IIM (Indian institute of management) or IIT (Indian institute of technology) graduates receive. Example; if the company in spending INR 7000 per month on a cubicle that you would sit in at your work location, they would add the yearly rent in your CTC.
  5. Interest free loan, if any CTC: banking companies like ICICI allow their employees to get car, home loans at highly subsidized rates and then add the amount equal to the difference between the market and subsidized interest rate to employee’s CTC. The interest that you did not pay is perquisite for you. If you don’t take loan, you won’t get this benefit, but it is anyway added to your CTC. Be careful while accepting the offer later.
  6. Company leased accommodation (CLA) in the salary package: your employer might provide you with the company paid accommodation or pay to landlord directly. It is saving you from the tension of finding a home and negotiating on rent deal.
  7. Free cabs and taxis for office commute: you would be lured to a new job with the option of free transportation to office. It is not free even it is subsidized. Most employers would add it to your salary package (CTC).

Employee Savings

Employee retirement saving contribution

Payments made to your long-term saving account by your employer.

  1. Employer provident fund contribution: most employers contribute 12% (called PF) of basic salary every month to employee’s provident fund account, shown in CTC. Employee also contributes 12% (call VPF).
  2. Gratuity is part of CTC: paid at the 4.81% of total yearly basic salary, per Indian tax law, with no withdrawal allowed before 5 years. If you leave the organization any time before 5 years, you lose your gratuity accumulation.
  3. Superannuation: a pre-defined amount is contributed every month in your superannuation account, mostly offered by multinational companies as a way of saving for retirement. You can withdraw it after you retire or at the time of leaving the organization. Most employers do not directly give you cash on separation though. You get an option of converting the amount in to some kind of insurance policies.

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 dependent 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: Taxes cause 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.

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.

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5 Comments
    • Avatar
      Ashli
      Apr 07, 2020 04:47 am Reply

      Hi! This article deserves all the appreciation, it is well written and
      with many valuable information.

    • Avatar
      Ria Wackerly
      Apr 10, 2020 09:26 am Reply

      A motivating discussion is definitely worth comment.
      I think that you ought to publish more about this issue, it might not
      be a taboo subject but usually folks don’t speak about these subjects.
      To the next! All the best!!

    • Avatar
      g
      Jun 15, 2020 23:22 pm Reply

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      Your blog provided us useful information to work on. You have done a extraordinary job!

    • Avatar
      g
      Jun 16, 2020 13:03 pm Reply

      Can you tell us more about this? I’d want to find out some
      additional information.

    • Avatar
      g
      Jun 17, 2020 00:29 am Reply

      I could not refrain from commenting. Very well written!

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