In the realm of salary calculations, three primary components are crucial: Cost to Company (CTC), Gross Salary, and Net Salary. Each plays a significant role in determining the overall compensation package for an employee. Below is a comprehensive breakdown of these components and their sub-elements.
1. Cost to Company (CTC)
CTC represents the total cost incurred by an employer for hiring and maintaining an employee. This includes not only the salary but also various benefits and contributions. The formula for calculating CTC is:
CTC = Gross Salary + Employer Contributions
- Employer Contributions: These are additional costs borne by the employer, such as Provident Fund (PF), Employee State Insurance (ESI), Gratuity, Bonus, and Variable Pay. These contributions are essential for providing a comprehensive benefits package to employees.
2. Gross Salary
Gross Salary is the total remuneration before any deductions are made. It is calculated by subtracting employer contributions from the CTC:
Gross Salary = CTC – Employer Contributions
Gross Salary is composed of several components:
- Basic Salary: This is the core component of the salary, typically ranging from 40% to 50% of the CTC in private companies. It is fully taxable. In government companies, Basic Salary often includes Dearness Allowance (DA), while in private companies, Basic and DA are usually combined and referred to as Basic Salary.
- House Rent Allowance (HRA): HRA varies based on the location. For metropolitan cities, it is typically 50% of the Basic Salary, while for non-metropolitan cities, it is 40%. HRA is partially taxable, with certain exemptions available under income tax rules.
- Conveyance Allowance: This allowance is provided to cover commuting expenses and is fully tax-exempt up to ₹1,600 per month.
- Medical Allowance: Employees can claim medical allowances up to ₹1,250 per month, but this is tax-exempt only if medical bills are submitted to support the claim.
- Educational Allowance: This is tax-exempt up to ₹100 per child, with a maximum of two children.
- Special Allowance: This is fully taxable and varies by company.
- Other Allowances: These can include meal coupons, phone allowances, etc., and are fully taxable unless specified otherwise by the company.
The sum of these allowances constitutes the Gross Salary.
3. Net Salary
Net Salary, or take-home pay, is what remains after deductions from the Gross Salary:
Net Salary = Gross Salary – Employee Deductions
Employee deductions include:
- Provident Fund (PF): Employees contribute 12% of their Basic Salary towards PF, which is a retirement savings plan.
- ESIC Contribution: Employees contribute 0.75% of their Gross Salary towards ESIC, but this is applicable only if the Gross Salary is less than or equal to ₹21,000 per month.
- Professional Tax: This varies by state and is based on income slabs. For example, in Telangana, if the Gross Salary is below ₹20,000 per month, the Professional Tax is ₹200.
- TDS (Tax Deducted at Source): TDS is based on income tax slabs and exemptions. Generally, no TDS is deducted if the annual salary is below ₹5 lakhs.
Employer Contributions
These are additional costs borne by the employer:
- Provident Fund (PF): Employers contribute 13% of the Basic Salary towards PF.
- ESIC Contribution: Employers contribute 3.25% of the Gross Salary towards ESIC.
- Gratuity: Gratuity is calculated annually using the formula:
Gratuity=Basic Salary26×15×Years WorkedGratuity=26Basic Salary×15×Years Worked
To find the monthly gratuity, divide the yearly gratuity by 12.
- Bonus: Typically, 8.33% of the Basic Salary is paid as a bonus in manufacturing or industrial sectors.
- Variable Pay: This depends on company policy and may vary significantly.
Standard Deduction
Since the financial year 2019–20, a standard deduction of ₹50,000 per annum has been introduced. This replaces the earlier exemptions for medical and conveyance allowances, providing a simpler way to claim tax deductions without needing to submit bills.