What is CTC, and How It is Calculated?

CTC is a common term that every salaried employee must have heard during salary negotiations. So, what is CTC in salary? CTC, or Cost to Company, goes beyond your monthly salary. Understanding your salary involves decoding the term CTC. It includes allowances, benefits, and perks, forming the total value an employer invests in an employee. 

This blog will talk about what CTC is, how it's calculated, and shed light on the components contributing to this vital financial metric.

What is CTC?

Coming to the meaning of CTC, it stands for Cost to Company. It embodies the overall expense a company incurs for employing you. It's a composite figure comprising various elements that may vary between employers. There are certain components when it comes to what CTC is in a job, what they are and how it matters. The upcoming sections will discuss these aspects in detail. 

How to Calculate Cost To Company (CTC) in Salary?

CTC represents an employee's complete annual compensation, encompassing all benefits and in-hand salary. It varies based on factors like base pay, perks, and variables. 

The calculation involves adding the gross salary to benefits, such as EPF, gratuity, allowances, insurance, and travel expenses. In simple terms, CTC is an employer's combined expense for hiring and sustaining its employees. 

Here is the formula for calculating your CTC:

CTC = Gross Salary + Allowances + Gratuity + Group Insurance + Other benefits, for instance, travel expenses.

Now, let’s understand what is CTC in salary with an example:

Suppose an employee has a gross salary of Rs 8,00,000 per year. Additionally, the employer provides allowances of Rs 1,60,000, gratuity of Rs 80,000, group insurance totalling Rs 1,28,000, and other benefits like travel expenses amounting to Rs 32,000.

CTC = Rs 8,00,000 + Rs 1,60,000 + Rs 80,000 + Rs 1,28,000 + Rs 32,000

CTC = Rs 12,00,000

In this scenario, the employee's CTC would be Rs 12,00,000 annually. This sum reflects the basic salary and all the additional components and benefits the employer provides. 

Components of CTC

Now that you know what is the meaning of CTC, here are the components for the same:

• Basic Salary: Base pay from employers, excluding bonuses, forms the basic salary.
• House Rent Allowance (HRA): Assists in accommodation costs, with tax implications—tax-free for some, taxable otherwise.
• Phone and Internet Allowance: Covers work-related communication costs, now standard for remote employees.
• Incentives or Bonuses: Additional bonuses, like performance or yearly incentives, enhance the overall CTC.
• Special Allowances: Uncategorised funds in CTC, covering remaining amounts not allocated elsewhere.

Understanding these components provides a comprehensive view of an employee's total compensation under CTC.

What Benefits are Included in the CTC (Cost to Company)?

In exploring the components of CTC, it's helpful to understand the included benefits. These perks go beyond the basic salary, contributing to an employer's all-inclusive compensation package.

1. Direct Benefits

Direct benefits within the CTC encompass elements like the basic salary and allowances—direct financial compensation the employee receives, contributing to their monthly earnings.

2. Indirect Benefits

Indirect benefits include perks such as insurance, gratuity, and allowances that indirectly enhance the employee's well-being, contributing to a comprehensive compensation package.

3. Savings Contribution

Savings contributions involve components like the Employee Provident Fund (EPF), ensuring a portion of the CTC contributes to the employee's future financial security and well-being.

What is the Gross Salary?

Gross salary is the total earnings before deductions. It includes the basic salary and all additional components—HRA, allowances, bonuses, the sum before tax and other deductions.

Gross Salary = Basic Salary + HRA + Allowances + Bonuses

What is the In-Hand Salary?

In-hand salary is the amount an employee receives after deductions like taxes and other withholdings. It represents the employee's actual take-home pay after all applicable deductions are considered.

In-Hand Salary = Gross Salary - Deductions

Difference Between Gross Salary and CTC

While Gross Salary and CTC may seem similar, they hold distinct meanings. CTC represents the company's total expense to hire and maintain its workforce. In contrast, Gross Salary is an employee's complete income before any deductions. 

Removing PPF deductions, group insurance premiums, and gratuities from CTC yields the gross salary. 

Further, deductions, including taxes, result in the Net Salary—an individual's take-home pay. CTC encompasses direct, indirect, and savings benefits, offering a comprehensive view of the employer's investment, whereas Gross Salary is the pre-deduction income for the employee.

Calculation of Your Taxable Income

Understanding your salary structure is the initial step, recognising components as fully taxable, partially taxable, or fully exempt. Items like basic salary, bonus, commission, and specific allowances are fully taxable. Partially taxable allowances encompass HRA, LTA, conveyance, medical, education, hostel, and special allowances. Check your salary slip for clarity.

Here’s how you can calculate the taxable income:

• Sum up various salary components, including allowances and basic pay.
• Subtract the non-taxable portion of allowances like HRA and LTA (Leave Travel Allowance). Determine HRA exemption using the Income Tax Department's formula, considering factors like actual HRA received and rent paid.
• Subtract professional tax and claim the standard deduction of Rs 52,500.
• Include additional income sources like interest, fees, commission, rental income, or capital gains.
• The sum of all income sources yields the gross total income.
• Deduct tax deductions from the gross taxable income to determine the net taxable income and understand your tax liability.

How Does CTC Influence the Process of Obtaining a Personal Loan?

CTC plays a major role in the Personal Loan application process, impacting eligibility and the finance loan terms. 

Impact of CTC on loan finance 

• Loan Eligibility: A higher CTC often translates to higher loan eligibility.
• Interest Rates: CTC can influence the interest rates offered on Personal Loans.
• Loan Amount: A significant CTC may result in approval for a more considerable loan amount.
• Repayment Capacity: Several lenders assess CTC to gauge an applicant's repayment ability, affecting loan terms.

How to Apply for a Personal Loan Online?

Here are the steps to apply for a Personal Loan using the best online loan app from Hero FinCorp:

• Download and install the Hero FinCorp Instant Personal Loan app.
• Register using your mobile number.
• Enter a few necessary details like your personal, professional, employment, and financial information.
• Scan and upload the required documents, including your identity, address, and income proofs.
• Once the verification process is completed, you get approval with a loan offer.
• Accept the loan offer to initiate the disbursal process.

Conclusion

Understanding "what is CTC in salary" is essential for understanding salary structures. Your CTC is not merely a figure but a comprehensive package encompassing various components shaping an employee's financial profile. 

In the future, you can ask your employer questions like, “What is CTC for 2023-24?". This will help you make a well-informed decision regarding your employment terms and financial well-being.

Frequently Asked Questions

1. Is the Cost to Company the same as Take-home Salary?

No, the Cost to the Company (CTC) differs from take-home salary. CTC includes various components like benefits, allowances, and bonuses, whereas take-home is the net pay after deductions.

2. Are all components of CTC paid monthly?

Not necessarily. While some components, like basic salary, are monthly, others, like annual bonuses, may not be paid monthly.

3. How is the CTC determined for an employee?

CTC is determined by summing up all components, including basic salary, allowances, bonuses, and benefits that an employer invests in an employee annually.

4. Is it possible to get a Personal Loan if my CTC includes variable components?

Yes, you can get a Personal Loan if your CTC includes variable components. Lenders assess your overall compensation package and financial stability.

5. Can I use a part of my CTC as collateral for a Personal Loan?

No. Personal Loans are unsecured, so lenders do not require you to provide collateral.