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8/2/2019 All About CTC - MControl

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I HAVE never understood my payslip till date, says Avni Rustagi, a native of Punjab. Avni, 25, moved toBangalore four years back in the hope of turning her dream into reality. In that order, she took up work as a des igner with

an Information Technology firm.

Avni pays Rs 10,000 as rent for a spacious apartment, but ask her about how she manages her other expenses and s he

throws her hands up in the air. Numbers scare me, she admits. I dont know a thing about finances.

She says, For ins tance, I dont even unders tand my pay structure or CTC as it is called, what I get in hand or why I get

that much.

Wealth realised that Avnis dilemma is a common problem with most working people. The transformation from CTC to

take home leaves mostly everyone confused. Lets decode and understand what happens when CTC becomes take

home.

What is CTC?

CTC is nothing but the cost that the company incurs to employ you and keep you employed. It includes your pay and

anything else that the company may incur to keep you in employment. Here is Avnis CTC or Cost to Company.

Particulars Rs (per annum)

Basic 480,000Dearness Allowance 48,000

Entertainment Allowance 12,000

House Rent Allowance 96,000

Conveyance Allowance 12,000

Overtime Allowance 12,000

Medical reimbursement 15,000

Gross salary 675,000

Companys contribution

to provident fund

57,600

Annual CTC 732,600

Monthly CTC 61050

Avnis salary package is quite transparent. However, each company has its own method of calculating CTC. Companies

may offer an attractive CTC pay structure but the take home may be subs tantially lower. Here are s ome components that

are commonly used in the CTC:

1. IT companies often add training costs in the CTC. These costs are incurred by the company for training the

employees. So, naturally these do not come in the form of take home.

2. Banks include interest subsidies in CTC. That is, if you are a bank employee, you are entitled to a discounted rate on

loans.

16-10-2010 Moneycontrol Wealth

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3. er ormance onuses are a so nc u e n t e . ese are var a e components an you w e pa out a

percentage of the bonus depending on your performance.

4. Companies may include the cost of group medical or life insurance. Some companies may add food subsidies, that

is, you may be getting a subs idy on your lunch in the office canteen.

5. Some companies include gratuity in the CTC. Gratuity is a sort of bonus that is paid out when you resign or retire from

your company. The catch: You are entitled to gratuity only after completing 5 years in the company.

Read: Section 80C tax saving ins truments

What is the difference between CTC and take home?

As you probably gauged, CTC is not the same as take home. Your take home is always lower than your CTC. Besides

examples mentioned above, there are two major components that eat into the CTC. They are:

1. Tax liability

The company calculates your tax and deducts it every month from your CTC. This includes income tax as well as

profess ional tax.

2. Contribution to PF

Here is the confusing part. Provident fund contribution has two sides the employers contribution and employees

contribution. The employers contribution is included in the CTC as it is a cost that the company incurs to employ you.

This is usually 12 per cent of the bas ic salary. However, this contribution is not paid out to you monthly. It is directly

depos ited in your PF account and paid to you when you retire or res ign.

There is als o employees contribution to PF. This amount (usually 12 per cent of the basic salary) is deducted from your

monthly salary and depos ited in your PF account.

Now let us calculate how Avnis CTC becomes her take home.

Step 1: Calculate tax:

ParticularsTaxable amount

(see notes below)

Basic 480,000 (1)

Dearness Allowance 48,000 (2)

Entertainment Allowance 12,000 (3)

HRA 52,800 (4)

Conveyance 2,400 (5)

Overtime Allowance 12,000 (6)

Medical Reimbursement Nil (7)

Gross taxable salary 607,200

Tax 86,685 (8)

Net annual salary 205,155

Net monthly salary 43,376

Read: How do taxes affect my salary?

Notes on tax calculation:

Lets look at it step by step.

1. Basic salary is fully taxable under Section 17 of the Income Tax Act, ie in Avnis case Rs 40,000 is fully taxable.

2. Your Dearness Allowance and overtime allowance are fully taxable.

3. The taxability of entertainment allowance depends on the company policy. In Avnis case, this is wholly taxable.




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owever, n some compan es, enterta nment a owances ecome tax ree s are su m tte to t e extent t at t ese

expenses were used towards office purposes.

4. House Rent Allowance (HRA) exemption is applicable only if you are living in a rented hous e and not in your own

house. HRA calculation in Avnis case is as follows :

The minim um 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)

ORc. 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 Avnis case it would be Rs 211,200 (40% of 528,000)

The least amount of the three would be Rs 43,200, which is exempt. That means the actual taxable amount would be

Rs 96,000 (less) Rs 43,200 = Rs 52,800

5. Conveyance allowance of Rs 9,600 per annum is exempted from tax. So, in Avnis case Rs 2,400 will be subjected to

tax. Again, this is according to her company policy. In some companies , if the balance is used for official purposes, the

amount becomes tax free.

6. Overtime allowance is fully taxable.

7. Medical reimbursem ents, if subs tantiated with bil ls , are exempt to a limit of Rs 15,000 annually. So, Avni can produce

medical bills for a maximum of Rs 15,000 to her employer. If you are allotted a annual medical reimbursem ent of Rs

20,000, Rs 15,000 would be tax exempt if you submit bills , which means youd have to pay tax on the remaining am ount

of Rs 5,000.

Some other allowances and reimbursements which may be part of your package are food coupons (sodexho, ticket

restaurant), phone reimbursements, books and periodical reimbursements etc. The taxation of this would depend on

your company policy.

8. Avni falls in the highes t tax bracket. This tax amount includes education cess too. Of course, this calculation is done

assuming that Avni does not make any tax saving investments. If she invests the maximum perm iss ible lim it of Rs 1

lakh, her tax comes down to Rs 55,785.

Read: FAQs: Tax on gifts

Step 2: Deduct provident fund and professional tax

Out of the CTC, employers contribution to PF will not be included in the take home, as discussed earlier. Employees

contribution, that is Avnis contribution would have to be deducted.

Avnis monthly take home would be:Net monthly salary (post income tax) Rs 43376

less Avnis contribution to provident fund Rs 4,800

less Professional tax Rs 200

Monthly take home Rs 38,376

So while Avnis monthly CTC was Rs 61,050, her take home is just Rs 38,376

How can Avni increase her take home?

Avni can plan her taxes and increase her take home. If Avni invests Rs 1 lakh (the l imit under section 80 C) in tax saving

instruments l ike PPF, ELSS etc, her annual tax comes down to Rs 55,785.

Gross taxable salary 607,200

Tax 55,785




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Net annual salary 551,415

Net monthly salary 45,951

(Less) Pf contribution 4,800

(Less) Professional tax 200

Monthly take home 40,951

It is also important that while she changes jobs , she should take some time to understand the package offered to her to

ensure that the CTC is friendly and ensures m aximum take home.

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