From CTC To Gratuity: Understanding The Common Terms Used In Your Salary Structure

As soon as we land our first job and step into the corporate world, one of the most puzzling tasks for us is to understand our salary structure, right?

Does having an annual CTC (cost to the company) of, say, ?8 lakh mean that you will get a monthly in-hand salary of ?8 lakh/12 ?66,667? This is not the case. That¡¯s exactly where the components of the salary structure come into the picture.

Common Terms Used In Salary Structure

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1.CTC: CTC stands for Cost To Company. It's a list of components that constitute "how much a resource/talent costs a company."

2. Basic Salary: This is a key component of the CTC structure. It is a fixed component of the salary and usually comprises 40% to 50% of the total CTC.

3.Gross Salary: This is the total salary before factoring in various deductions. Gross salary can be arrived at by adding the basic salary, HRA, bonus, and allowances.

4.HRA or House Rent Allowance: This is provided as a part of the rent expenditure incurred by the employee for residence. The HRA component offered is different for different cities, even by the same employer. HRA allowance is partially exempt as allowed under the Income Tax Act.

5.Leave Travel Allowance (LTA): Some employers also offer their employees an allowance that covers the cost of domestic travel when the employee is on a holiday. This allowance is paid only to compensate employees for actual trips taken, either for themselves or their dependent families.

6.Conveyance Allowance: This allowance is allowed for incurring the expenditure of travelling from home to the workplace.

7. Dearness Allowance: Government employers generally provide this allowance as a percentage of basic salary to meet the rise in inflation over a quarter. The % of dearness allowance depends on the inflation rate of the economy.

8. Provident Fund: A portion of the salary gets deposited in the PF account of the employee. Employer and employee both contribute to the contribution. The contribution to the PF account is 12% of basic pay.

9. Training, telephone, books, and periodicals allowances: Many companies tend to provide a separate portion of the CTC for incurring external training expenditures, mobile bill payments, and the purchase of books/periodicals.

10. Variable Components: Besides your fixed portion of CTC, the variable part includes your annual bonus, performance bonus, etc.

11. Net Salary or Take Home Salary: Net Salary = Basic Salary + HRA + Allowances Income Tax, Employer's Provident Fund, and Professional Tax

12. Special allowances: Some employers offer special allowances to adjust the amount of total CTC given to employees. This is usually a fully taxable allowance.

13. Grade pay: Based on the seniority of the employee, grade pay is the monetary compensation a person earns at a job that uses a pay grade system. This type of payment system is generally structured and preset, and it does not involve salary negotiation.

14. Gratuity: This is the lump sum amount paid to employees after they complete 5 years of service. As the name suggests, it is the amount paid as a gratitude towards the employee for their dedication and hard work over the years of their service.

Calculation of Cost to Company

Gratuity: (Basic salary + DA) ¡Á 15/26 ¡Á No. of years you have worked for the company

Taxable income: Gross Salary: EPF/PPF Contribution; Tax-Free Allowance; HRA; LTA; Health Insurance; Tax-saving Investments; Other Deductions

Take-home Salary (Net Salary Post Taxes): Gross Salary, Income Tax, EPF Contribution, and Professional Tax

Gross salary: CTC, EPF, and gratuity

The salary calculations involve multiple components, as per Cleartax. So you need different formulas to calculate each aspect of your salary.

How do I calculate the monthly in-hand salary?

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Your monthly EPF contribution = 12% of Rs 15,000 = Rs 1,800

Your monthly in-hand salary is the amount that remains after all deductions from your gross compensation have been made. As per cleatax, if, for example, your CTC is Rs 7.5 lakh and your firm pays you Rs 50,000 as a bonus each year, your annual salary is: Gross Salary = CTC + Bonus = Rs 7.5 lakh minus 50,000 = Rs 7 lakh

To calculate your total salary deductions, do the following:

The yearly professional tax must be deducted from the gross salary. The amount of professional tax varies by state (we'll assume Rs. 2,400 in your state).

You must subtract the entirety of your and your company's EPF contributions. Your EPF contribution is matched by your employer. EPF contributions are determined based on a maximum monthly salary of Rs 15,000 per month.

Your yearly EPF contribution = Rs 1,800 x 12 = Rs 21,600

Your company's annual EPF contribution is Rs 21,600

Let¡¯s assume your employee insurance deduction is Rs 2,000 per year.

Professional tax + EPF (employer + employee) + insurance = Rs 2,400 + Rs 21,600 + Rs 3,000 = Rs 48,600.

Overall annual take-home pay = gross salary - total deductions = Rs 7 lakh - Rs 48,600 = Rs 6,42,400.

Monthly take-home pay = yearly salary divided by 12 = Rs 6,42,400 divided by 12 = Rs 53,533.

Also Read: TCS Planning To Double Employees' Salaries By Upskilling Them

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