Salary is one of the strongest motivators for employees. Hence, it is essential that they clearly understand the various components of their salary. Understanding these components would help the employees appreciate the multiple benefits they enjoy with the company.
When we refer to employee salary, there are a myriad of abbreviations and terms used, which might be confusing to someone who is currently trying to understand the basics. Hence, we will help you understand the different terms used and make you aware of the various components that make up your salary structure.
What is CTC?
The CTC or the ‘Cost-To-Company’ is the amount that the company spends on keeping a staff member employed with their organization. The ‘cost to company’ is the amount usually quoted in interviews and job descriptions when the company is searching for a new candidate to fill a vacant role in the organization.
Kindly note that the CTC is different from the Gross Salary that the employee receives as there are other parameters involved. Hence, it is crucial to understand the various components of the CTC or the cost to company.
CTC Break up
To understand the salary structure of an employee, we need to look at the various components of their CTC. It will give a good idea of the various direct and indirect benefits that an employee enjoys while employed with the organization.
The CTC break up also ensures that a new hire understands the amount they will be able to earn as the ‘take home salary’ and the various additional benefits that the company is providing on top of the statutory bonuses and requirements such as ESI, EPF, etc.
Hence, let us look at the CTC break-up to understand the components that make up the salary structure of a company:
Basic Salary of an employee is the primary component of their salary. The other parts of their income are based on the basic salary. Being a fixed component of the salary structure, it varies as per the employee’s designation, their experience and the type of industry they are in.
The basic salary is usually 40% to 50% of the CTC and is fully taxable. The other major salary components, such as PF, bonus, gratuity, etc., are percentages of the basic salary, and any change would impact the other parts.
The Gross Salary is the amount of salary resulting from adding the basic wage to other allowances provided by the company without removing the various deductions. Hence, we can arrive at the formula for calculating gross salary:
Gross Salary = Basic Salary + All Allowances
It also includes other allowances such as bonuses, HRA, medical assistance, mobile allowances, and any other allowances provided by the company. Hence, the gross salary helps the employees understand the total amount they are receiving as part of their employment with the company.
Net Salary or Take Home Salary
The Net Salary refers to the amount that the company provides the employee after removing all the deductions such as the provident fund, income tax, professional tax, medical insurance, etc. It is also called the ‘take-home salary’ or the ‘net salary payable’. We can arrive at the formula for calculating net salary:
Net Salary = Gross Salary – (Income Tax + PF + ESIC + Other Deductions)
The net salary is the amount that the employee receives in their bank accounts or ‘in-hand’ for their usage after all the required deductions are removed. Hence, it is also called the ‘in-hand salary’ in colloquial terms.
Allowances refer to the extra benefits provided by the company for being a part of the organization. Companies are free to decide the different kinds of allowances for their employees. Hence, the allowances provided may differ from one designation to another in the same organization. In some cases, allowances may be used to even out the salary structure to ensure that the final figure is rounded off.
The common types of allowances are:
House Rent Allowance (HRA)
The allowance provided for renting out an apartment for accommodation.
The allowance provided against commuting to work daily.
Leave Travel Allowance (LTA)
The allowance provided against long-distance travel for company purposes.
This allowance is provided against using a mobile phone for company purposes.
The allowance provided against the employee’s medical expenses.
Dearness Allowance (DA)
The allowance provided against rising inflation.
Also Read: Employee Benefits and Perks: What are the different types?
Arrears refer to the income that the company was liable to pay in the previous salary; however, they are paying it in the current salary cycle. Arrears are usually a corrective mechanism for rectifying any salary mistakes that might have occurred in the previous salary cycle. For example, the company might have forgotten to add the sales incentive or any performance bonus to the last month’s salary. Hence, that amount is added to the current month’s salary as an ‘arrear’.
Arrears might be any kind of extra amount that the company is liable to pay the employee. Some companies even provide an additional amount while adding the arrear component to ensure that the employee feels good about their salary.
Gratuity is the amount provided to an employee for continuing with the same company for a minimum of five years. It is provided as a vote of thanks from the employer for sticking with the same company for so long and a token of gratitude for providing their services to the organization.
Employees who stay with the same company for a minimum of 5 years are eligible for gratuity; however, companies can consider it a part of the CTC from the first year of employment. It is typically 4.81% of the basic salary of the employee.
Reimbursements refer to the amount paid by the companies to compensate for the amounts the employees have spent for the company. Companies generally reimburse medical bills, trips related to office, phone and paper bills, etc. Although it is not technically a part of the employee’s salary, it is still considered part of it.
For reimbursing an amount, the employee is supposed to provide proof of the spending. Additionally, organizations generally limit the various kinds of spending that the employee can be reimbursed for. It is done to ensure fair usage and curb any malpractice. The limits and the services for which the employee can be reimbursed will depend on the employee’s designation and time with the company.
Provident Fund (PF) or Employee Provident Fund (EPF) refers to the amount deducted as part of the statutory investment that the employee and the employer make towards the employee’s retirement benefit. The employee’s deduction is 12% of their basic salary. In comparison, the employer is required to pay 12% of the basic salary of the employee as well as the additional 1% of administrative charges towards their EPF.
One should also note that PF is applicable only for companies with 20 or more working staff members. Since PF refers to the retirement fund for the employee, it proves ultimately beneficial for them when their retire from their work.
ESIC, or the Employee State Insurance Corporation, provides all employees with one year of medical insurance for 1 lakh Indian Rupees. As a premium for this medical coverage, the employer should deduct 0.75% of the employee’s gross salary while also paying 3.25% of their gross salary to the government.
ESI covers the employees in cases of outpatient care, hospitalization and surgeries. The ESI Act was passed in the year 1948. Since then, the ESIC component has been mandatory if an employee’s gross salary is less than ₹ 21,000.
Also Read: ESI Calculation | How to Calculate ESI in India | Pocket HRMS
Loans and Advances
Although loans and advances aren’t technically parts of the salary, they are still a critical component in the overall salary structure. Loans refer to loans provided by the company to the employee against their pay, and advances refer to the salary provided in advance in rare instances where the employee is in urgent need of money.
The HR department presets these parameters as a percentage of the employee’s income. Whenever employees wish to use it, they can connect with the relevant personnel to get the necessary approvals. We should also note that different organizations have multiple conditions that need to be fulfilled to be eligible for either of these components.
Income tax refers to the tax paid by every working employee to the Government of India. The Central Government charges it depending on your income slab rate; you must pay a fixed portion of your salary to the Government in the form of income tax.
The income tax taken from the employees is used to fund public services, pay any obligations of the Government, and provide goods and services for every citizen of the country. Businesses are also required to pay income tax by law on their profits every year.
Professional tax is the tax levied by the state governments on the incomes of salaried individuals. It is deducted from the Gross Salary before paying the employee their wages. Not every state government charges these taxes, and you can skip paying them entirely in some states in India.
The professional tax rate to be paid also varies from state to state. Additionally, the amount of gross salary paid as professional tax is also dependent on the employee’s income slab.
Since salary is a crucial aspect of employment, it is necessary that one should be aware of the various components of the salary. While the common abbreviations might be confusing for someone new to the system, it is quite easy to wrap your head around once you understand the basics.