Understanding the Difference Between CTC and Your Take Home Salary

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I remember being hired for my first job. It was a college campus placement and I was really proud of myself since I was one amongst the few people who were selected for the job. We were given appointment letters showing CTC as INR 240,000. I was delighted and had already thought of all the ways to spend my first salary. But all my excitement came to a standstill when I got my first pay slip and it was not what I expected. There was a drop.

Well, I am sure many of us have gone through the same phase once in our work career. Now that I am clear about what is the difference between CTC and the take home salary, I would like to discuss the same with all of you.

What is CTC?

Starting with the most basic question- What is CTC? CTC or Cost to Company is the total expenditure a company would be incurring once it employs you. It includes both monetary and non-monetary perquisites, such as basic salary, dearness allowance, conveyance allowance, training costs, House Rent Allowance, Transportation allowance, medical reimbursements, Leave Travel Allowances, mobile/ telephone bills allowances, etc that are borne by the company to keep you employed.

What is your take home salary?

Take home salary or pay is that portion of your salary that an employee actually gets to take home after paying all deductions and taxes. Thus, this is the amount that you actually get to spend. It is very important that you understand the difference between a CTC and your take home salary as this will directly affect your budget allocations for short term as well as long term. Let us understand this with the help of an example:

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Suppose, a person has the following salary structure that has been agreed upon with the employer. You should keep in mind that you can have a flexible salary structure depending upon your relations with your employer.

Clothes Personal AccessoriesOther Necessary Stuff
Basic salary3,00,000 3,00,000
House Rent Allowance (HRA)-note 1 1,00,000
Conveyance Allowance 19,200
Entertainment Allowance6,0006,000
Children Education Allowance 2,400
Medical Reimbursements15,000
Gross salary 4,42,600 3,06,000
Medical Insurance 3,000
Provident Fund (PF) (12% of Basic salary) 36,000
Total Benefit 39,000
CTC = Gross salary + Benefit 4,81,600

Break-up of take home salary:

Deduction/ take home salary Amount (INR)
Tax (as per slab rate)-note 13,768
Employee Provident fund (12% of basic salary)36,000
Professional tax2,500
Total deduction42,268
Gross salary4,42,600
Net salary (Gross salary – total deductions)4,00,332
Monthly take home salary33,361

Note 1: In case of HRA, minimum of the following is exempt:

  • Actual HRA
  • Rent paid-10% of basic salary
  • 40%/50% of basic salary (depending on city of residence)

In the example, actual HRA received is INR 100,000. Assuming rent paid by the employee is INR 180,000 per annum and the city of residence is Delhi, the least of the following will be exempt:

  • INR 100,000
  • INR (180,000 – {300,000*0.10}), i.e. 150,000
  • INR (300,000*0.50), i.e. 150,000

Since the minimum amongst the three is 100,000, nothing is taxable.

Note 2: Assuming the assessee is not a senior citizen, the minimum exemption limit is INR 250,000, above which tax rate is applied at the following rates:

Clothes Personal AccessoriesOther Necessary Stuff
Basic salary3,00,000 3,00,000
House Rent Allowance (HRA)-note 1 1,00,000
Conveyance Allowance 19,200
Entertainment Allowance6,0006,000
Children Education Allowance 2,400
Medical Reimbursements15,000
Gross salary 4,42,600 3,06,000
Medical Insurance 3,000
Provident Fund (PF) (12% of Basic salary) 36,000
Total Benefit 39,000
CTC = Gross salary + Benefit 4,81,600
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Break-up of take home salary:

Deduction/ take home salary Amount (INR)
Tax (as per slab rate)-note 23,768
Employee Provident fund (12% of basic salary)36,000
Professional tax2,500
Total deduction42,268
Gross salary4,42,600
Net salary (Gross salary – total deductions)4,00,332
Monthly take home salary33,361
Slabs
Rate of tax
Upto 250,000


NIL
250,001-500,00010%
500,000-1,000,00020%
Above 1,000,00030%

Since, the taxable income is INR 306,000, as per the above slab rate, tax is levied @ 10% plus 3% education cess. Further rebate under section 87A is allowed to an individual earning upto INR 500,000.

Tax calculated is as follows:

ParticularsAmount (INR)
Upto 250,000NIL
306,000-250,00056000*0.10= 5600
Education cess @ 3%5,600*0.03= 168
Total tax5,768
Rebate u/s 87A*2,000
Net tax3,768

*It is proposed to amend section 87A by increasing the maximum amount of rebate available from existing INR 2,000 to INR 5,000 with effect from 1st April 2017. Let us now understand the meaning of the above components of CTC in detail:

  • Basic salary: This is your base amount of salary and forms the basis of many components of salary. This is dependent on one’s position in the company.
  • HRA: This is the compensation given for payment towards rent accommodation. A part of this or sometimes full exemption is given from taxes as explained in note 1 above.
  • Conveyance allowance: This is given to employees to meet travel expenses from residence to work place. Recently in Budget 2015, the exemption limit was increased from INR 9,600 per annum to INR 19,200 per annum.
  • Children education allowance: This is the allowance provided to an individual to meet the education expenses of children. However, this can be availed for maximum 2 children upto INR 100 per month
  • Medical reimbursements: This is fully exempt upto INR 15,000 provided supporting bills are provided.
  • Provident fund contributions: This is of two types, namely, Employee’s contribution and employer’s contribution. Both are generally 12% of basic salary. It should be noted that this contribution is directly deposited in the Provident Fund and is not paid out to the employee. The payments from the fund is released when the employee resigns or retires.
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Thus, it is very important to evaluate your CTC very carefully before accepting the job and also make sure that you understand each and every salary component correctly and understand their impact on your take home salary. This is because the big fat CTC that you are offered on the table can often lure you in making improper job decisions. Thus proper awareness and tax planning is the need of the hour these days.