All you need to know about Concept of Cost to Company (CTC)

Many of us have come across terms like Cost to Company (CTC), Gross Earnings, take home pay, net payout, and so on while working for a company or applying for a job. If you are an entrepreneur, you must have said something similar to your employee. There has always been a disparity between the CTC and the take-home pay, which causes confusion. In this article you will get all you need to know about CTC. 

Concept of Cost to Company (CTC)

CTC and Gross Earnings are synonyms that can be used interchangeably. CTC essentially refers to the amount that the company intends to spend on you or the total amount that the company is willing to pay you in terms of your basic salary + Medical Insurance + Shuttle facility + Variable Bonus + Free meals + Overtime allowance, and so on.

CTC = Gross Salary + Benefits in local parlance (non-monetary Benefits)

For example, the company provides medical insurance to all of its employees and pays Rs 5000 to each employee. In this case, Rs 5000 will be deducted from the CTC.

Elements of Cost to the Company

CTC consists of both monetary and non-monetary elements. The CTC’s main components are as follows:

• Monetary Components

• Non- Monetary Components

Let us discuss these components one by one.

Monetary Components

The following includes monetary components:

• Basic Salary: This is the most important part of your pay. Depending on the company policy, basic pay is typically 40% to 50% of your total CTC.
• House Rent Allowance (HRA): In your CTC, this amount is typically 40% to 50% of your Basic Pay.
• Other Allowance: As defined in the Income Tax Act, 1961 this category includes allowances such as medical allowance, entertainment allowance, leave travel allowance, and special allowance.
• Bonus: As an added bonus, it could be both fixed and variable (which is based on your performance during the period)
• Reimbursements: The Company may make reimbursements as part of the CTC, such as fuel reimbursement or telephone reimbursement.

Non- Monetary Components

You will also find CTC’s non-monetary benefits. These include all other benefits provided to employees in exchange for not having to deal with frustration and stress. Such benefits are managed by the company, and employees benefit from them. The following includes non- monetary components:

• Coupons for Food
• Medical Coverage
• Cab service
• Provident Fund (Employer and Employee Contributions)
• Taxation for Professionals

Compensation Dispute

The majority of the time, negotiations takes place over CTC, which is usually divided into variable and fixed parts. Nonetheless, it is critical to comprehend and, if necessary, negotiate the various components of the CTC. That could help you get a higher take-home pay.

The Difference between CTC and Take-Home Pay

The difference between the CTC and the take-home pay is primarily due to non-monetary components, which are essentially the other benefits provided by the company to its employees and are deducted when calculating the take-home pay. Aside from the aforementioned factors, the difference between the CTC and take-home pay is due to TDS (tax deductible at source), which is a mandatory deduction under the law. So, your take-home pay is the amount credited to your bank account at the end of each month CTC is a broader term that derives from take-home pay, or you can say CTC is a more inflated term in comparison to take-home pay.

How to Calculate Take-Home Salary?

There are several methods for converting CTC to take-home pay. Some of these methods are based on land and taxation laws, while others are influenced by company policies and compensation structures.

Here’s an example to help you understand the various salary components, CTC, and how to calculate take-home pay from CTC.

In this case, the take-home pay would be

Take-Home Salary = CTC – Non-Monetary Benefits – Professional Tax – TDS

Endnote

To summarise, Cost to Company can be defined as the total wage package offered by a company to its employees. CTC refers to the total amount of money spent on an employee by a company over the course of a year. In a nutshell, it is your gross salary before any applicable deductions, such as tax deductions.