You need to know the specifics of the compensation being given to you as a new employee. You should be familiar with the numerous breakdowns and elements that make up your compensation or pay package. A salary breakup is essentially a list of criteria that determines your pay.
Employees frequently confuse CTC, basic salary, gross compensation, allowance, reimbursements, tax deductions, provident fund, insurance, etc. For freshers to comprehend, we have attempted to define all words related to salaries as simply as possible in this post.
CTC or Cost to Company for Salary Breakup
An employee’s annual salary and benefits package is known as their CTC, or Cost to Company. It is essentially the sum that a business or employer is willing to invest directly and indirectly in you as a member of its workforce. The CTC includes monthly and yearly components, including gratuity, annual variable pay, bonus, and other benefits. The monthly features include base pay, various allowances, reimbursements, etc. CTC is frequently used in India’s private sector to display an individual’s total compensation.
CTC does not indicate the take-home salary of an employee. The CTC includes several items that go above and beyond one’s take-home pay. The optimum CTC formula would be as follows:
CTC = Gross Salary + [Direct Benefits + Indirect Benefits + Savings Contributions]
CTC components
Gross Salary, which includes Basic Salary, House Rent Allowance (HRA), Conveyance Allowance, Entertainment Allowance, Overtime Allowance, and Medical Reimbursements, are some of the components of CTC. Then there is Benefit, which consists of Medical Insurance and Provident Fund of PF. CTC is, therefore, the total of Gross Salary and Benefits.
On the other hand, the Deduction piece consists of contributions to PF and EPF as well as professional tax and TDS, or tax deducted at source. Therefore, CTC can be considered the total of Earnings and Deductions.
CTC = Earnings + Deductions
Basic salary
Before any additional payment or payment deduction, an employee’s basic wage is the precise amount provided to them. It is never more significant than the gross salary. The actual basic wage is included in take-home pay, and this portion is entirely taxable. Thus, the basic wage, which accounts for 40–45% of the total CTC, is the foundation of the salary breakup.
Gross salary
The monthly or annual income paid out before any deductions are known as the “gross salary.” It is the total of one’s basic wage plus additional compensation before any tax and other deductions.
Gross Salary = Basic Salary + HRA + Special Allowance + Education Allowance + Conveyance Allowance + Medical Allowance + Leave Travel Allowance
Net salary or take-home salary
Take-home pay is another name for net salary. It is the income that employees receive after deductions for taxes, PF, and other expenses.
Net Salary = Gross Salary – Income Tax – PF – Professional Tax
Typically, net salary is less than gross salary. The net wage equals the gross salary if there is no PF contribution and no tax according to the government’s tax slabs.
Allowances
It is the compensation given to an employee for fulfilling service obligations. These are in addition to base pay and vary from business to business. The following is a list of some typically allowed variations:
- HRA, or House Rent Allowance, is a significant compensation component for an employee to cover lodging costs.
- LTA, or leave travel allowance, is money to cover domestic travel costs. It might not include expenses for lodging and food incurred while travelling.
- Conveyance Allowance is the sum given to an employee to cover their transport costs to and from work.
- Dearness Allowance (DA) is a stipend given to workers to help offset the impacts of inflation. Pensioners, public sector workers, and government employees are all eligible for this benefit. Employees in the private sector do not qualify for the dearness allowance.
- The special allowance, medical allowance, incentives, and other benefits are also included in CTC. Each serves a role by assisting the employee in covering a particular expense.
Reimbursements
The CTC of an employee includes reimbursement sums. Many reimbursements are available to employees, including medical, food, phone, and fuel. Only after the money has been spent can the employee claim it. To be eligible for this payment, they must present the requisite receipts to demonstrate that they have paid the required sum for such headings.
Provident Fund and Employer Provident Fund (EPF & PF)
According to the Employees Provident Funds and Miscellaneous Provisions Act of 1952, the Employees Provident Fund (EPF) is a statutory retirement benefits programme. The EPF programme is run by the Employees Provident Fund Organization (EPFO). The employee and the employer contribute to the EPF scheme every month at 12% of the basic salary and dearness allowance (DA). The Employee Pension Scheme receives 8.33% of the employer’s contribution (EPS).
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Gratuity
Employees who work for a company for five or more years may receive a gratuity as compensation for their efforts. According to the 1972 Payment of Gratuity Act, it is due. You must meet specific requirements to get a bonus, such as being qualified for superannuation, having retired from one job, having resigned after five years with the company, or in the event of your death, disability, illness, or accident. The employer will deduct the gratuity amount from your CTC each year, even though you can only collect it after working for the company for five years.
ESIC
Employees who earn a monthly gross pay of less than Rs. 21,000 are eligible for the ESIC programme through their employer. The company will contribute 4.75% of the total wage, and the employee will donate 1.75%.
Professional Tax
Any salaried individual who earns money and works as a Chartered Accountant, Company Secretary, Attorney, or Doctor must pay professional tax. Each state has a different professional tax calculation procedure. The maximum annual payment is Rs. 2,500. Employers must withhold professional tax from employee salaries at the established rates before paying it to the State Government.
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