CTC and your Salary breakup

Nov 14th, 20107 Comments

Are you joining your first job or switching jobs, it is important to understand the difference between Cost To Company (CTC) and take home salary.Certain components of your salary inflate your CTC, but you do not get them as part of your monthly pay. You need to understand all components separately to realize impact on your net salary.It will help you in better negotiation with the HR and structuring of the salary.

Components of Cost to Company (CTC) Salary

  • Basic
  • Dearness Allowance (DA)
  • Retirement Benefits
  • Incentives or bonuses
  • Conveyance allowance
  • House Rent Allowance (HRA)
  • Medical allowance
  • Leave Travel Allowance or Concession (LTA / LTC)
  • Telephone / Mobile Phone Allowance
  • Special Allowance


Basic

As the name suggests, this forms the very basis of your salary. This is the core of your salary, and many other components may be calculated based on this amount.Basic usually depends on your grade within the company’s salary structure.
Many deductions are also dependent on the basic – for example, your contribution to provident fund is 12% of your basic.It is a taxable component of your salary.

Dearness Allowance (DA)

The Dearness Allowance is paid out to compensate for increase in the general cost of living due to inflation.DA is paid out every month.It is a taxable component of your salary.

Retirement Benefits

  • Provident Fund: Each month, a certain percentage of your salary (usually, a percentage of your Basic Pay) is invested in it. This percentage varies from company to company, and is usually between 8% and 12%. (12% is the norm).Moreover, the company you work for contributes an equal amount to your PF account on your behalf.And that’s the best part – it’s not just you making the investment: the company makes an equal investment for your retirement! Isn’t that great? It’s free money, after all!

(Well not totally free – for those of you working for private companies, the company’s contribution to PF would be part of the cost to company – CTC – salary computation).

  • Gratuity: Companies manage gratuity through a fund maintained by an insurance company. The payment towards the gratuity annually is sometimes shown in CTC.

Incentives or Bonuses

Incentives or bonuses are paid out depending on your performance (and, at times, depending on the company’s / division’s performance as well). This is to reward employees for their better performance.Incentive is usually paid out monthly. A bonus can be paid out monthly or can be paid out once a year.The two types of bonuses that are normally paid out are:

  • Fixed Annual Bonus: Paid on the basis of employee performance, either monthly or in most cases annually.
  • Productivity Linked Variable Bonus: Complete bonus amount is paid only on 100% achievement of target, nevertheless it still is included as part of your CTC.

Incentives and bonus are fully taxable.

House Rent Allowance (HRA)

House Rent Allowance (HRA) is paid out to meet full or part of your expenditure on renting a house.HRA may be expressed as a percentage of your basic.House Rent Allowance is paid out every month.HRA can be tax-free, subject to certain conditions.

Conveyance Allowance: Paid for daily commute expenses. Up to an amount of Rs 800 per month(Rs 9600 pa) is exempt from tax.Any amount over it is taxable.

Medical Allowance

Medical allowance is paid out to help you with the amount that you spend on medical treatment and medicines.Medical allowance can be paid out monthly or yearly.
Medical allowance is a fully taxable component of your salary.However, if you receive reimbursement of your medical expenses against submission of bills, such medical reimbursement is tax-free upto Rs. 15,000 per year.

Leave Travel Allowance (LTA/LTC): It is the cost of travel anywhere in India for employees on leave.
If an employee has LTA allowance as Rs 50,000 in his CTC(cost to company), and he provides proofs of Rs 40,000 (boarding pass, air tickets, taxi vouchers) then income tax will be deducted for rest of the Rs 10,000.
The tax rules provide for an exemption only in respect of two journeys performed in a block of four calendar years. The current block runs from 2010-2013

Telephone / Mobile Allowance

This is an allowance given to you so that you can maintain a telephone (landline or a cell phone).It is usually paid out monthly, and is taxable.

Special Allowance

Special Allowance can be given out to pay money that doesn’t fit into any other head!Such allowances are paid out monthly, and are taxable.

Each company too has its own way of calculating the cost to company.

*One must take time to find out what the actual benefits are by asking for the break-up of the CTC so as to know the entitlement.

*If you are just joining the company, try to negotiate with the HR as to opting out of some facilities in exchange for increasing the take home.

Kevin Gala

info@investinsure.in

6 Responses to “CTC and your Salary breakup”

  1. Mayuresh says:

    Very helpful information for me…i didn’t know the details about tax n stuff applicable for different components..thanks dude :)

  2. Rahul says:

    Very useful information
    Thanks Kevin

  3. Gaurav says:

    Never got into tis detailed on my CTC…..thanks

  4. Umesh Lamkane says:

    very insightful

  5. [...] 3. The rent exceeds 10 per cent of your salary (BASIC + Dearness Allowance).(Click here to Understand your Salary Components) [...]

  6. Ronak says:

    I had many doubts related to breakup and how to utilise each for tax saving… it has cleared it all … thanx …. keep doing gr8 job.

  7. Sunil Dhargalkar says:

    Good job… keep it up…..

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