Cost to Company (CTC) has become a common term in the employment world today. The biggest and the smallest employers prefer to offer a CTC package while making an offer of employment. So, in this edition we will learn to decode the CTC and negotiate better.
CTC> Gross Salary> Net Salary
CTC 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 the amount paid before the deduction of taxes or other deductions and is inclusive of bonuses, overtime pay, holiday pay, and other differentials. It is different from CTC as it does not include non-monetary benefits.
Net Salary or Take-Home Salary is the income that the employee actually takes home once tax and other such deductions. It is also known as in-hand salary. It iis calculated after making Income Tax Deductions at source (TDS) and other deductions as per the relevant company policy and state compliances.
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. In order to tempt qualified and experienced employees, employers also add a one-time joining bonus in the CTC package. However, it comes with a rider of a stipulated serving period else the employee would be liable to return the same to the employer. Adding this amount inflates the CTC.
Learn to negotiate the CTC to your advantage
Be careful of a very high basic component. Often people argue that a higher basic pay is better when negotiating the CTC as the variables may vary as per the prevailing conditions. But, they forget the higher the basic salary, the higher your EPF contribution would be. So, one needs to be careful of a very high basic component because it would reduce your 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. Sensible negotiation depends on your situation. When starting your career, it is always wise to negotiate for a higher take-home salary and a lower variable portion . However, if you hold a good experience and are confident about your capabilities then, negotiating for a higher variable pay could work for you.
Making an informed decision about which salary components work for you early in your career can help you optimise not just your monthly income but pave way for a more successful career.
Want to calculate the components of your CTC?
Here is the CTC calculator to help you decode your CTC at the click of a button!