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About HRA Calculation

House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries to employees for paying their house rent. This allowance is on the basis that the employee is renting a place for accommodation for his work purpose.

Cost to Company (CTC) has become a common term in the employment world today. CTC package is a term often used by private sector Indian companies while making an offer of employment. In this edition, learn to decode the CTC and negotiate better.

CTC> Gross Salary> Net Salary

CTC is a company’s spending on hiring and sustaining the services of an employee. It is the calculation of the total cost that a company would incur, on an employee, in a year, has become a norm. It contains all the monetary and non-monetary amounts spent on an employee.

Gross Salary is employee provident fund (EPF) and gratuity subtracted from the Cost to Company (CTC). It is the amount paid before the deduction of taxes or other deductions and is inclusive of bonuses, overtime pay, holiday pay, and other differentials.

Net Salary or Take-Home Salary is the income that the employee actually takes home once tax and other such deductions. It is the in-hand figure that is calculated after deducting Income Tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Gross Salary (-) Income Tax (-) Public Provident Fund (-) Professional Tax(if any)

Components of CTC (Cost to Company)
The CTC includes all the variable and invariable elements of a salary structure – basic salary, House Rent Allowance (HRA), Basic Allowance, Travel Allowance, Medical, Communication, Provident Fund, Pension Fund, Car Fuel, Bonus etc. It includes all direct and indirect benefits. Indirect benefits include interest free loans, insurance,food coupons, office space rent etc, mobile bills etc.

Why do companies prefer CTC?
Companies prefer the CTC model as it seems pleasing to the ears of the employee. To lure away qualified and experienced employees, employers also offer a one-time joining bonus with a rider that if the employee leaves the job before a predetermined period s/he will have to return this amount of one-time joining bonus. Adding this amount inflates the CTC.

Learn to negotiate the CTC to your advantage

Be careful of a very high basic component. Employers include their share of PF contribution in the CTC. The higher the basic, the higher your EPF contribution would be, so you need to be careful of a very high basic component because that would mean less take home pay.

However, a high basic also means that you will be eligible for higher gratuity which is paid at the time of leaving the company provided you have completed five years with the employer.

Moreover, PF money comes back to you with interest when you retire, along with helping you avail a tax deduction of up to Rs150,000, under Section 80C of the Income-tax Act.

Negotiate for a better pay. It is advisable to negotiate for a higher take-home salary and a lower variable portion when you are just starting out. However, if you are in the higher income bracket and want to leave an impression about your capabilities, negotiating higher on the variable pay could work for you.
Understanding which salary components work for you early on can help you maximize not just your monthly income but can also free up money for investments in the long term.