Understanding CTC
To have a good understanding of this topic let’s look at a CTC offered to a candidate – an example of which is shown below, . Typically your CTC is divided into following 5 sections –
- Fixed Salary (Basic, DA, HRA, Bonus, Special Allowance etc.)
- Variable Salary (Performance based bonus)
- Reimbursements (Meal, Medical, Fuel, Driver etc.)
- Retiral Benefits (Provident Fund, NPS)
- Soft Benefits (Gratuity, Life Insurance, Hospital Insurance, Accidental Death Benefit etc.)
Some may also have a section around Joining Bonus or other conditions which needs to be evaluated on a case-by-case basis. Let’s now look at each of the section separately.
Section 1a – Salary
Typically the Section 1 comprises of fixed components of salary but in this example, both fixed as well as reimbursable components have been merged so we will have a look at both of these together.
I have separated the Fixed components from above and noted them separately, namely Basic, HRA and Special Allowance. Also, these components are noted in CTC as monthly basis, so I have written an annualized version of the same for sake of better understanding. Don’t worry, at the end we will try to find the exact in-hand amount that you will be getting basis these values.
While getting an offer, try to have a close look at the % composition of these components. For e.g. in this case the Basic salary is approx. 50% of the CTC – this is good. Typically your Basic should be >40% of your CTC as a number of components are calculated basis the Basic in your Salary like Provident Fund, NPS etc. So always try to negotiate for higher Basic.
The flip side of having a very higher basic is that if you wish to claim HRA exemption, then the amount may come less as one of the factors in calculation of HRA exemption is based on your basic salary.
Section 1b – Reimbursements
Reimbursements are the elements of your CTC which you get against the actual spends. Usually one needs to submit claims in their finance department to get the credits against these spends. Any amount claimed under these reimbursements are typically not taxed to certain limits. Any unclaimed reimbursement amount is added to your Fixed Salary and is thus subject to taxes.
Since the reimbursements help in lowering your Tax burden, look to increase your allocation to reimbursements if you have equivalent spends. Unnecessary increasing your allocation may result in blocking of your income till the end of the year leading to lower monthly salary credit.
Section 2 – Variable Salary
Section 3 – Retirals
The retirals section will consist of 2 components –
- Provident Fund
- NPS
(Ignore the LTA amount as it has been covered under the Reimbursements section)
Provident Fund
The Provident Fund is covered under the The Employees’ Provident Funds Scheme, 1952. The PF contributions are divided into 2 parts:
- Employee Contribution – 12% of (Basic + DA)
- Employer Contribution – 12% of (Basic + DA)
For people who are a member of EPFO before 1-Sep-2014, the Employer Contribution is further divided into 2 parts.
- EPS Contribution – 8.67% of (Basic + DA)
- PF Contribution – 3.33% of (Basic + DA)
Now, if you refer to the screenshot above, the Provident Fund is noted as ₹21,600 which is firstly the Employer contribution (this is an unsaid rule for most of the corporates in India. Always get this verified while accepting the offer). The employee’s PF contribution is deducted on monthly basis from the rest of the salary.
Secondly, this has been calculated at the maximum capped basic salary of ₹15,000 which typically should be calculated at the actual Basic + DA of employee. A lower PF contribution will lead to the lower corpus amount for the retirement.
NPS (National Pension System)
A number of companies have started giving their employees an option for NPS wherein the contributions are exempted under Income Tax Section 80CCD(2) and thus resulting in lower tax outgo. This also helps individuals in maximizing their tax savings as NPS is a unique scheme which offers Triple Tax Saving opportunity.
For people in higher tax brackets, I always recommend to opt for this option.
Section 4 – Soft Benefits
These are sections that typically won’t impact your monthly salary but add to the overall benefits that the company has on offer. It is very important to note what’s on offer from a holistic perspective.
Similarly, its also important to see that many of these benefits will either usually come to play in case of an emergency or at the time of leaving the organisation.
As we can see above, the components under Soft Benefits are noted as Gratuity and Mediclaim Inurance.
Payment of Gratuity is as per Payment of Gratuity Act (POGA), 1972 and paid at the time of separation.
Mediclaim Insurance, also called as Hospital Insurance, covers the eventualities when an employee has to undergo medical treatment for self (or immediate dependents enrolled in the policy). The higher the amount of Medical Insurance provided, the better it is. In today’s time one should at least have a Mediclaim Policy with a family floater coverage of minimum ₹10 Lakh.
Section 5 -Soft Benefits Contd.
Some of the other Soft Benefits include Term Life Insurance, Medical Insurance, Joining Bonus etc.
These are amounts that would not be credited to your salary on a monthly basis but may extend financial support to you during your tenure in the organisation.
Summary
As we can see there is more to CTC than just the fixed amount and in fact due to a number of components and variables, what you will be getting at the end of the month will vary from individual to individual.
Next, I will be covering on what things should be kept in mind while negotiating CTC and how to determine your actual in-hand salary using CTC.