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You got a 10 lakh package and you calculated your salary as 10,00,000 divided by 12 is 83,333.33, but you got somewhere around 64,000 in your account. Where did the rest go? For most people, it is plain confusion especially when one gets a new job.  And Salary structure varies from one company to another. Cost to Company, Salary, Net Salary, Gross Salary, are these same or different. Cost TCompany is the total amount of money the company spends on you in a year. In this article, we cover what makes the salary? What is the difference between Cost to Company, Salary, Net Salary, Gross Salary?

Basic Salary = Fixed part of one’s compensation structure.  Usually 35-45% of total salary. (As per New wage Code, it would be 50%)

Gross Salary = Basic Salary + Dearness allowance(optional) + Other Allowances(HRA,LTA) + Perquisite(Gift Voucher, Stock options)

                         Net Salary = Gross Salary – Deductions(TDS, Professional Tax)

                         CTC = Net Salary +  Direct Benefits(EPF, Gratuity, Leave Encashment, Corporate NPS)  + Indirect Benefits(Laptop, Coffee,Office Rent)

CTC of Company, Basic Salary, Gross Salary

The excitement of getting the first job is punctured on getting the first pay. It is usually less than what the fresher employee expected. Usually, in the campus interviews company advertise their Cost to Company (or CTC) and people mistake their salary to be based on that (CTC/12). Educated but have No Financial Education is about the confusions of a new employee. Different types of salary and what they mean are given below.

  • Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components, ex HRA, are calculated based on this amount. It usually depends on one’s grade within the company’s salary structure. It is a fixed part of one’s compensation structure. Many allowances and deductions are described in terms of percentage of the Basic Salary. For example, Your PF is deducted at 12% of your Basic Salary. HRA is also defined as a percentage of this Basic Salary.
  • Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
  • Net Salary is what is left of your salary after deductions have been made.
  • Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
  • Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to employ i.e. all the costs associated with an employment contract.  Major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of the in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
    • Direct Benefits refer to amount paid to the employee monthly by the employer which forms part of his/her take home or net salary and is subject to government taxes.
    • Indirect Benefits refer to the benefits that employees enjoy without paying for them. The company pays them on behalf of the employee but adds these expenses to the employee’s CTC as it is an expense from the company’s point of view.
    • Savings contribution refers to the monetary value added to the employee’s CTC example EPF, Gratuity

Let’s see an example explaining the salary. An arbitrary salary breaks up is given below.

Note: salary structure varies from one company to another

Description Component of Salary(per annum or p.a) Amount
Basic Salary Basic Salary 480,000
Allowances Dearness Allowance  48,000
House Rent Allowance  96,000
Standard Deduction  50,000
Gross Salary 6,74,000
Benefits

vary from company to company

Medical insurance 2000
Provident Fund (12% of Basic) 57,600 (12% of 4,80,000)
Laptop 50,000
Total Benefits 109600
Cost to Company Cost to Company=Gross Salary + Benefits 6,74,000 + 109600=7,83,600

How do people earn money?

The three broad ways in which people earn money are as follows:

  • Working for someone else or Employee,
  • Working for themselves or Self Employed,
  • and running a business.
When a person works for someone else or company, (s)he is then said to hold a job and is called Employee. The person or the company he or she works for is called Employer.  Money that is paid is called Salary or Income or Wage.

Salary

As explained earlier Money that is received under Employer-Employee relationship is called as  Salary . If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income.( In such case your income would be treated as income from business and profession).

Did you know that word salary has come from Latin salrium based on salrius which means pertaining to salt. The word appeared in 1350-1400. In those days, salt , regular ordinary table salt, was a prized and valuable commodity. It was money given to Roman soldiers to buy salt. The phrases  the salt of the earth or worth your salt refer to the high value of salt.

The salary consists of following parts.

Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure.It is a fixed part of one’s compensation structure.  The basic salary differs according to the type of the industry. For instance, employees in the information technology industry get more take-home salary while employees in the manufacturing companies get more fringe benefits. Within a company, Basic Salary generally depends on her or her designation. Any increment in the salary is expressed as percentage of  Basic salary.

Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Children’s Education Allowance, City compensatory Allowance etc.  Allowance can be fully taxable, partly or non taxable.

Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.

How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.

Deductions: Two types of deduction are made from the salary

  • Compulsory deductions such as Provident Fund, Income tax, Professional Tax (where applicable) .
  • Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F, etc

Provident Fund Contribution

Provident fund contribution or EPF has two sides – the employer’s contribution and employee’s contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund(PF)  account and paid to employee when he retires or resigns.There is also employee’s contribution to PF. This amount  is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)

What is CTC?

  • Salary received each month
  • Retirement benefits such as PF and Gratuity
  • Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

DIRECT BENEFITS INDIRECT BENEFITS SAVINGS CONTRIBUTION
Basic Salary Interest free loans Employer Provident Fund (EPF)
Dearness Allowance (DA) Food Coupons/Subsidized meals Gratuity
House Rent Allowance (HRA) Company Leased Accommodation Superannuation benefits
Leave Travel Allowance (LTA) Medical and Life Insurance premiums paid by employer
Special Allowance/ City Compensatory allowance, etc. Income Tax Savings
Vehicle Allowance Office Space Rent
Telephone/ Mobile Phone Allowance
Incentives or bonuses
Standard Deductions

How to calculate Pay? How to calculate Take Home Salary?

With different types of salary questions that a new employee comes up with are How to calculate Pay? How to calculate Take Home Salary? What is Basic Salary Calculation in India? How is HRA calculated in salary?

Basic is either 50% or 60% of the Gross salary and depends if you want to escape from PF liability.. and rest of the entitlements are calculated accordingly..

Your Take-home salary will include

  • Gross Salary received each month
  • minus allowable exemptions such as HRA, LTA, conveyance allowance etc.
  • minus income taxes payable (calculated after considering Section 80 deductions)

Your Cost to Company (CTC)  includes 

  • Salary received each month
  • Retirement benefits such as PF and Gratuity
  • Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

What are allowances? What does your Allowance include?

Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. Some allowances are taxable, some are partially taxable and some are tax free. There are various Kinds of Allowances that one can get under the Head Salary. Some popular Allowances are

  • House Rent Allowance or HRA : The allowance is for expenses related to rented accommodation. Salaried individuals who live in a rented house/apartment can claim House Rent Allowance or HRA to lower taxes. This can be partially or completely exempt from taxes. Our article HRA Exemption,Calculation,Tax and Income Tax Return explains how HRA is calculated in salary in detail.
  • Conveyance allowance is given to employees to meet travel expenses from residence to work. The conveyance allowance for up to Rs.9,600 per annum is exempt from tax. Starting FY 2015-16, this limit has been increased to Rs.19,200 per annum.
  • Leave Travel Allowance: Salaried employees can avail exemption for a trip within India under Leave Travel Allowance. The exemption is only for shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children and parents, but not with other relatives.
  • Income Tax webpage talks of the Allowances available to different categories of Tax Payers, what are the exemptions available on Allowances, under which section of Income Tax Act.

Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to company. One can read Cost To Company or CTC salary: Understanding and Calculation for more details.

How tax affect the various components of salary

Component of Salary(per annum or p.a) Amount Tax Taxable Amount
Basic Salary 480,000 Full amount is taxable 480,000
Dearness Allowance  48,000 Depends on company policy. Mostly fully taxable.  48,000
House Rent Allowance  96,000 Applicable if living in a rented house. Minimum of three amounts (Note:Calculation shown below) 52,800
Entertainment Allowance  12,000 Depends on company policy. Mostly fully taxable. 12,000
Overtime Allowance  12,000 Fully taxable 12,000
Gross Salary 6,75,000 Gross Taxable Salary 6,07,200

HRA Calculation

As explained in HRA Exemption,Calculation,Tax and Income Tax Return , the minimum of the three amounts will be exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 – 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)
So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.
So the portion that will be taxed in this example is = 96,000 – 43,200 = 52,800

Tax
As Gross Taxable Salary  6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103. For tax estimator  Tax Calculator is  is very helpful.

Tax 57,103
Employee PF contribution(12% of Basic) 57,600
Professional Tax  2400
Total Deductions 1,17,103
Net Salary = Gross Taxable Salary – Tax =6,07,200- 1,17,103=4,90,097
Net Monthly Salary =490097/12=40,841.41

Can Take Home salary be increased?

Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed on 6,07,200- 1,00,00 = 5,07,200.

Amount to be taxed 5,07,200
Tax 33,413
Employee PF contribution(12% of Basic) 57,600
Professional Tax  2400
Total Deductions 93,413
Net Salary = Gross Taxable Salary – Tax =6,07,200- 93,413=5,13,787
Net Monthly Salary =513787/12=42,815.58
Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in this infographic. Optimum Salary Structure – Maximum In Hand Salary Or Minimum Tax Liability  explains how restructuring the salary would increase the take home

Proof of Salary being paid: PaySlip, Form 16

PaySlip

A paycheck is a document/record issued by an employer to an employee which shows how much money an employee have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions taken out of the gross amount to arrive at the final net amount of the pay.  One can read format of payslip or see a sample in the image below.

Example of Payslip which shows Basic Salary

Example of Payslip which shows Basic Salary

Form 16

If you are salaried employee in an organization, then you get the salary after deducting tax by the employer. This process is called as Tax Deduction at Source (TDS). Company must issue a Form 16 which contains the details about the salary earned by that employee and how much tax deducted.  The Tax deducted is paid to the government by the company. Form 16 is the proof of employee’s income and tax paid to the govt. It is issued under section 203 of Income Tax Act for Tax.  The tax payer has to use the Form 16 to file the Income Tax return every financial year.  One can read e Understanding Form 16: Part I and Understanding Form 16: Chapter VI-A Deductions, Understanding Form 16: Tax on income

Form 16 which shows Gross salary and Deductions

Form 16 which shows Gross salary and Deductions

Ref: Salary Income Tax – Heads of Income: Salary  Understanding CTC and Your Salary Breakup, Tax implications of salary components, All you wanted to know about CTC

Hope we are able to explain the difference between Salary, Net Salary, Gross Salary, Cost to Company.  Did you find the information useful? If you find some information missing or incorrect please let us know.

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