CTC is the amount decided by the company while recruiting an employee.
There are numerous questions that remain unanswered when it comes to CTC, as people are clueless how they are calculated. Here we chart down the details which would throw light on the subject in a better way. The cost to company includes a number of other components which include Provident Fund (PF), other allowances like House Rent Allowance (HRA) and medical insurance which are added to the basic salary. In short, the total CTC combines all these components and can be simply described as the company’s spending on recruiting and sustaining a service of an employee. CTC is basically evaluated as variable pay as its components are based on different factors which results in variations in the take home salary and the net salary of employees’ as the CTC varies on case to case basis.
CTC is in simple words is the sum total of direct benefit i.e. the sum paid to the employee on annual basis, indirect benefits i.e. the amount the employers pays on behalf of employee and savings contributions i.e. the saving schemes the employee is entitled too.
Cost to Company = Direct benefit + Indirect benefit + savings contributions.
Given below is the explanation of every single component that comes under CTC breakdown:
Basic Salary – The basic salary is different from CTC, as it doesn’t change. The total amount of your basic salary is the part of your take home salary.
Allowance – This component is included in your salary structure, which is basically provided to the employee to take care of their day-to-day needs which include:-
House Rent Allowance (HRA) – This is a part of the cost to company, an employer pays to its employee. The employee can avail tax benefit with HRA if employees pay for rent annually that comes up to 10% of take home salary.
Leave Travel Allowance (LTA) – This is another tax benefit component of CTC that is provided by the employers to the employees to cover their travel expenses. One important thing to be noted is that LTA covers only the travel allowance incurred during the travel.
Dearness Allowance – This allowance is incorporated to reduce the inflation effect on the economy.
Other such allowances which are the part of the cost to company are vehicle, medical, incentives, mobile phone, and special allowance.
There are various income tax calculators that can be used to calculate tax on your income. One can take help of these tools to calculate the exact amounts that gives a clear idea of their finances.