by Neha Mohanty (According to Indian Labour Law)
Terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, insurance, etc. often create confusion for employees. In this blog, we have attempted to delineate all the terms associated with the salary in order to make it simpler for you.
Read more to understand salary breakup and the various terms associated with it.
You can also calculate in-hand salary with the help of this Take-Home Salary Calculator.
CTC or Cost to Company is the total amount that a company spends (directly or indirectly) on an employee. It refers to the total salary package of the employee.
CTC is inclusive of monthly components such as basic pay, various allowances, reimbursements, etc. and annual components such as gratuity, annual variable pay, annual bonus, etc.
CTC is never equal to the amount of take-home salary of the employee. There are many components in the CTC that one does not receive as part of take-home salary.
CTC = Gross Salary + PF + Gratuity
Let us now discuss common salary components:
Basic salary is the base income of an individual. It is a fixed part of one's compensation package.
A basic salary depends on the employee’s designation and also the industry in which the employee works.
Gross salary is the amount calculated by adding up one's basic salary and allowances, before deduction of taxes and other deductions. It includes bonuses, over-time pay, holiday pay, and other differentials.
Gross Salary = Basic Salary + HRA + Other Allowances
Net salary or take-home salary
Net salary or take-home salary is obtained after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Basic Salary + HRA + Allowances - Income Tax - Employer's Provident Fund - Professional Tax
An allowance is an amount received by the employee for meeting service requirements. Allowances are provided in addition to the basic salary and vary from company to company. Some common types of allowances are discussed below:
- HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation.
- Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel.
- Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.
- Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. It is applicable to government employees, public sector employees, and pensioners only.
- Other such allowances are the special allowance, medical allowance, incentives, etc.
Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills, etc. The amount is not received in the salary, but on submission of the bills, reimbursement is given. Generally, there is an upper limit for every category of reimbursement.
Employer Provident fund/EPF or Provident Fund
Provident fund is an investment both by the employer and the employee each month, the lump sum amount of which acts as an employee's retirement benefits scheme.
Provident fund contribution is mandatorily either of the following:
Case 1: Basic salary < 15000 (per month)
12% of the basic salary
Case2: Basic salary > 15000 (per month)
In this case the company has an option to either contribute 12% of 15,000 (i.e. 1800) or 12% of Basic salary.
It is directly deposited in the employee’s PF account. .
Hence, 12% of the basic salary gets contributed by the employee and another 12% by the employer. Usually, the contribution from the employer can only be seen in your offer letter and not in the payslip. Contribution from your salary is called EPF and it can be seen in the payslip. Contribution to the provident fund is mandatory for Indian companies.
Public provident fund or PPF
PPF is a voluntary contribution by the employee and is completely controlled by him/her. The employer has nothing to do with a PPF account.
This amount is not mentioned in CTC or pay slips, however, if an employee presents it as an investment for tax saving purpose, it will be shown on Form 16.
People open PPF account for two main reasons - one is for tax saving purpose and second for long-term investment. PPF provides 7.6% per annum (compounded annually) and more importantly, both the contribution and maturity amount is tax-free.
Do not confuse this with Employer's PF contribution.
The company issues a Form 16 which contains the details about the salary earned by the employee and the amount of tax deducted.
The taxpayer is required to submit Form 16 to file the Income Tax returns every financial year. It acts as the proof of his/her income and tax paid to the government.
Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job.
Though an employee can receive the gratuity amount only after 5 years, it will be deducted by the employer every year and hence it will get deducted from your CTC.
Life insurance and health insurance
Many companies provide health insurance and life insurance to their employees, the premium for which is borne by the employer and is included in the CTC. Hence it has to be deducted while calculating your take home salary.
Let us understand income tax and how it is related to salary income and salary components.
The tax levied on one’s personal income is called income tax. Usually, an employee gets his or her salary after the tax deduction by the employer. This process is called as Tax Deduction at Source (TDS). The deducted tax amount is paid to the government by the company.
Professional tax is the tax charged by the state government in order to let an individual practice a certain profession. The maximum amount payable per year is INR 2,500. It depends on one’s monthly salary and also on the state in which one works. The professional tax levied varies from state to state in India.
Professional tax is not applicable in the following states and union territories:
Arunachal Pradesh, Andaman & Nicobar, Chandigarh, Dadra & Nagar Haveli, Daman & Diu, Delhi, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Lakshadweep, Nagaland, Punjab, Rajasthan, Uttarakhand, and Uttar Pradesh.
To calculate income-tax, include income from all sources such as:
- Salary (salary paid by your employer)
- House property (rental income, or interest paid on home loan)
- Capital gains (income from sale purchase of shares or house)
- Income from any business/profession
- Other sources (saving account interest income, fixed deposit interest income, interest income from bonds)
HRA received is not fully exempt from tax. HRA that you can claim is the lowest of the following:
- The total amount received as the HRA from the employer in the financial year.
- Actual rent paid in the year – 10% of the basic salary in the year.
- 50% of the annual basic salary if staying in a metro city or 40% of the annual basic salary if staying in a non-metro city.
2. Standard deduction
In Budget 2018, a standard deduction of Rs 40,000 (annually) has been introduced. Before this, there was a transport allowance of maximum INR 19,200 (annual) and Medical allowance of maximum INR 15,000 (annual), which are no longer applicable.
Travel cost can be claimed for tax exemption under Section 10(5), twice in a block of four years. LTA covers only domestic travel, and the amount is provided on submission of actual bills.
Please not that some components of the salary such as medical reimbursements, telephone bills reimbursement, etc. are exempt from the tax deduction.