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What is CTC, Gross Salary and Net Salary?

Comprehending the components of one’s daily, weekly or monthly income is an important aspect of being an employee. If you’ve just begun working and aren’t sure how much you’ll make at the end of the month. In this post, we’ll go over all you need to know about CTC, Gross Salary and Net Salary calculations.

Cost To Company (CTC)

In nations like India and South Africa, the term “cost to company” refers to an employee’s complete compensation package. It is the entire amount of money a company spends on an employee over the course of a year.

The expense to the business, also known as CTC, is the expenditure incurred by the firm to recruit new staff. It consists of many components that are attached to the base salary, like HRA, healthcare coverage, provident fund, and so forth. Meal vouchers, taxi service, subsidized loans, and other benefits may be included.

The total cost to the company is the sum of Direct BenefitsIndirect Benefits, and Savings ContributionsDirect Benefits refers to the amount explicitly paid to the employee on an annual basis by the employer. Indirect Benefits implies payment made by the employer on behalf of the employee on an annual basis. Saving Contributions are plans in which an employee, an employer, or both invest in order to save money for the employee.

                                               CTC

                                                                    = 

                                                       Direct Benefits

Basic Salary, House Rent Allowance (HRA), Medical Allowance, Conveyance Allowance (CA),

                                         Dearness Allowance (DA), Phone Allowance

                                                                    +

                                                    Indirect Benefits 

Low-interest Loans, Health Care Costs, Meals & Snacks, Company Leased Accommodation,

                              Life & Medical Insurance premiums, Office Space Rent

                                                                  +

                                               Savings Contributions

                    Employer Provident Fund (EPF), Superannuation Benefit,Gratuity

To explain some of the above-mentioned terms further-

Basic Salary: This is a fixed part of one’s compensation that never changes. The in-hand salary is another term for this.

Allowances: Beyond the basic salary, there are a variety of allowances available to help employees meet their basic daily needs such as transportation to and from work, housing rent and accommodation, medical and phone bills up to a specified amount per year, and so on.

Dearness Allowance: This covers the cost of living, which is adjusted each year to account for rising inflation.

Low-interest Loans: Bank employees are eligible for a special, subsidised rate on loans.

Health Care Costs: Health care benefits, including health insurance, are commonly provided to formal salaried employees. This insurance may cover both the employee and their family members.

Meals & Snacks: Employees can take advantage of meal and snack outlets in modern workplace settings. The employer pays for this benefit on behalf of the employees.

Company Leased Accommodation: Many companies offer to find and pay for an employee’s residence, especially if they are relocating for work.

Life & Medical Insurance premiums: As part of their Human Resource policies, several companies offer health and life insurance to their employees. Some businesses also cover the family members of their employees under their group health insurance plans.

Office Space Rent: Some companies charge a specified amount of rent for the office space that a specific employee occupies.

Employee Provident Fund (EPF): Employees’ Provident Fund, or EPF, is a retirement savings plan for employees recommended by The Ministry of Labour. It serves as a long-term savings instrument for the employee, which they can use in an emergency. According to section 264 (9) of the Labour Act 2006, every permanent employee must contribute to the fund every month after completing one year of service in the establishment, in an amount that is not less than 7% and not more than 8% of his monthly basic wage.

Gratuity: This is a monetary addition made by an employer to an employee’s compensation as a token of appreciation for the employee’s services. If the company implements a gratuity policy, the employee is entitled to 30 days’ salary for each completed year of service or for a length of service surpassing 06(six) months, or 45 days’ salaries for more than 10 years of service in the company.

Superannuation Benefit: The employer makes a pre-determined contribution to the employee’s account. At the time of retirement, this might be withdrawn.

Gross Salary

The Gross Salary is the amount paid to an employee before taxes are deducted and after the Employee Provident Fund, (EPF) contribution and gratuity are deducted from the CTC.

The gross compensation includes direct and indirect benefits, overtime pay, and other differentials.

                                    Gross Salary = CTC – (EPF + Gratuity)

Net Salary: After-tax deductions, an employee’s net salary is the amount they get in cash or in their bank account.

Net Salary = CTC – (EPF + Gratuity + Income Tax/Tax Deducted at Source (TDS)

Essentially, what separates Gross Salary from Net Salary is the deduction of income tax. It is the final amount the employee takes home, which is why it is also called the “Take-home Salary”.

Closing Remarks

In conclusion, it is critical for one to have an in-depth knowledge of their income and its constituents in order to make wise financial decisions such as budgeting, travel plans, loan take-outs etc. We hope the basics of the terms specified above has helped you to grasp an understanding of these. If you have any queries, do not hesitate to reach out to us!

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