Very often, people tend to confuse CTC, in-hand salary, and gross salary and tend to use them interchangeably. However, the Cost to Company amount is different from the latter two in many ways.
To know what CTC means in salary and how to calculate CTC, keep reading this blog till the end.
What does CTC mean in Salary?
The full form of CTC is Cost to Company. In simple terms, CTC means a specific amount that a company spends on an employee annually.
While discussing CTC in salary, we must not forget the essential components that constitute your cost to company amount. This primarily includes your gross amount and additional benefits like health insurance, provident fund, and gratuity.
CTC in salary means a comprehensive compensation package for an employee for the entire year that a company incurs. So, it can be a variable pay considering several direct and indirect expenses.
To know more about what is costs to company amount, keep reading.
Components of CTC in Salary
Take a look at the following components of what CTC includes in salary.
- Basic Pay
- Dearness Allowance
- Bonus or Incentives
- Medical Allowance
- House Rent Allowance
- Conveyance Allowance
- Vehicle Allowance
- Special Allowance
- Telephone or Mobile Allowance
How is CTC Calculated in Salary?
You can use the mathematical formula below to calculate CTC meaning in salary.
CTC= Direct Benefits + Indirect Benefits + Contribution to Savings
Example of CTC Calculation in Salary
To understand how to calculate your CTC with the above formula, let’s consider a simple example.
For this, let’s break down the components of CTC:
Direct Benefits
| Description | Amount |
|---|---|
| Basic Salary | ₹6,00,000 per year |
| HRA | ₹2,00,000 per year |
| Bonus | ₹1,00,000 per year |
| Special Allowance | ₹50,000 per year |
₹(6,00,000+2,00,000+1,00,000+50,000)=
₹9,50,000 per year
Indirect Benefits
| Description | Amount |
|---|---|
| Health Insurance | ₹20,000 per year |
| Company Provided Vehicle | ₹30,000 per year |
Total Amount= ₹(20,000+30,000)= ₹50,000 per year
Savings Contribution
| Description | Amount |
|---|---|
| Provident Fund | ₹60,000 per year |
| Gratuity | ₹25,000 per year |
Total Amount: ₹(60,000+25,000)= ₹85,000 per year
Your total CTC will be:
CTC= Direct Benefits + Indirect Benefits + Savings Contribution
CTC= ₹(9,50,000+50,000+85,000)= ₹10,85,000 per year
As you can see, calculation of CTC requires you to consider a large number of parameters. These components or parameters might vary for every employee depending on the benefits and savings options. Manual calculation of CTC in salary for every employee will thus become a complicated process. It can also lead to errors in calculation. To avoid such instances, you can opt for payroll management software that looks into the payroll calculation of every employee. With a CTC calculator, you can also convert CTC to in-hand salary easily
What are the Differences Between Gross Salary and CTC?
CTC and gross salary are different from one another. The table below will help paint a clear idea of the distinct factors that help distinguish gross salary vs CTC.
| CTC | Gross Salary |
|---|---|
| The annual amount that a company incurs for an employee. | This is the total salary the employee receives after tax deduction. |
| Gross salary, indirect benefits, and savings are the essential components for CTC in salary. | Basic pay, HRA, DA, Special Allowances, and bonuses make up gross salary |
| CTC represents the overall package an employee receives and is higher than gross salary. | Gross Salary is lower than CTC but higher than net salary. |
| CTC is useful for annual budgeting and job switching. | Essential for monthly payroll disbursal. |
| Parts of CTC are tax-exempt | Gross Salary is taxable |
How is CTC and In Hand Salary Different?
The table below will take you through the points that differentiate between CTC vs in-hand salary.
| CTC | In Hand Salary |
|---|---|
| A total compensation package that an employee receives annually from employer. | This is the actual amount that employee receives after required deductions. |
| Basic Pay, HRA, Allowances, bonuses, and employer's contribution to savings make up meaning of CTC in salary. | In-hand salary is the gross salary after excluding the necessary tax deductions. |
| CTC considers the sum of all associated costs that employer bears for an employee annually. | This is the monthly gross salary of an employee after-tax deduction |
| Usually higher than gross salary | Always lower than gross salary |
| Essential for annual budgeting of an employee | This is the monthly amount that employee receives from CTC and gross salary. |
| Certain components of CTC can be tax-exempt. | The in-hand salary is subject to income tax and other deductions. |
Bottom Line
This is everything you must know about meaning of CTC in salary and how to calculate it. Computing CTC for individual employees every month with the necessary parameters can be a complex and confusing task. It is also tough to maintain a manual record of CTC of every employee.
To handle these tasks with ease, you can implement an organization management system with an online payroll calculator. This payroll manager will compute and record CTC and salaries for every employee with the necessary tax deduction.
Sounds interesting? To know more about how Emossy Payroll can introduce efficiency in CTC calculation process, explore our website.
Frequently Asked Questions
What is HRA in CTC?
House Rent Allowance in CTC is an essential part of your salary. Employers provide HRA to cover the expense of your rented accommodation under Section 10 (13A) of Income Tax Act, 1961
What is Expected CTC?
As the name suggests, expected CTC refers to the amount that a person tends to expect while looking for a new job.
How is CTC calculated?
The mathematical formula to calculate CTC is Direct benefits + Indirect Benefits + Savings Contribution.
