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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

The Power of Compounding

Nov 9th, 20102 Comments

Compounding interest is the greatest mathematical discovery of all time-Albert Einstein

There once was a king whose daughter was very ill. The king announced to his people that whoever cured his daughter can marry the princess and ask for another reward. One young man came and cured the princess with his family owned secret remedy. The king was so happy that he anxiously asked the young man what else he wanted besides marrying the princess. The young man pointed to a chess board with 64 squares on it and said just put one grain of rice in the first cube and two in the second, four in the third, and eight in the fourth, and so on until the 64th square is filled up.

The king laughed and confirmed with him, if he really wanted rice grains and not GOLD !! The King did not realize what he agreed to at that particular time. By the time they reach 32nd cube, all the rice reserve of his Kingdom was exhausted, It was staggering 214 Crores grains itself… Each of the subsequent cubes required the King to double up the grains. King had to ask other Kingdoms for Grains and till he reached 45th cube, Rice Grains of all the kingdoms finished … Eventually the king had to handover his entire kingdom to this clever person.

Thats Power of Compounding !!


Compounding is a very interesting and powerful thing. It has great rewards in store for people who invest when they are young. If you invest later in life you will not be able to make use of the great “power of compounding

You simply need to be consistent in saving a portion of your money and let it compound over time. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth.

How does compounding work?

When you save Rs 100 and get an annual interest of 10%, you will have Rs 110 at the end of one year. Due to compounding the next year you will get a 10% interest on Rs 110, which will then leave you with Rs 121. The next year, interest will be calculated on Rs 121 at 10% and so on. In time, these savings will grow exponentially.

There are certain number rules that have been evolved to figure out a quicker method for calculations, especially in finance. Rule 72, is one such quick method of calculating how much time it will take, for your investment to double.

So, if you invest Rs 100 with a compounding interest of 10% per annum, the rule of 72 gives 72/10 = 7.2 years as the approximate time frame required for the investment to become Rs 200.

If you equate the same to a larger amount of Rs 1 lakh in approximately 7 years, it would grow to 2 lakh. Remember you will be consistently saving up too, topping up existing funds, hence, if you are planning to retire 60 years from the time of the investment, it will approximately snowball to about 6 times from its original value. This is the avalanche effect of compound interest.

Fortune favours the early bird!

Compounding interest is like wine, yields better results when money is saved over longer durations. So, if you are planning to save crores for your retirement funds, then start as early as possible, with your first salary or at least by 25 years of age. So, when you retire at the age of 60, you will be sitting on a comfortable pile of money to lead the rest of your life in style.

If you set aside a sum of say Rs 5,000 every month from the age of 25, at a return interest rate  of 10%, in 60 years you will have with you funds worth about a crore and more.

However, if you start at 40 with the same amount and return rate of interest, the retirement fund will amount to only around 33 L. That is a huge difference, the 40 year old individual would need to invest several multiples of Rs 5000 to be able to catch up!

Here is a comparative chart of the approximate retirement funds an individual can lay claim to depending on the age at which he starts saving.

Let us assume the individual plans to invest Rs 10,000, every year at a return interest rate of 10%. You will realize from the chart that starting early counts a lot!











You will notice from the above comparison, that even a matter of five years can make a huge dent on how much you retire with.

You could choose to start saving when you are much older and still meet the target retirement fund of 49 lakh, saved by an individual who started investing from the age of 20.

However, you will need to increase the amount of money you invest to make up for the lost time. This could be a strain on your budget, as you may have to set aside a significant amount of money to reach your goal.

All you need to reap the advantage of compounding interest and save up a significant retirement fund is to invest time, consistency, patience, and savings to obtain a financially secure future, when you need it the most.

Kevin Gala

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