Introduction to Cost to Company (CTC)

Definition of CTC:

Cost to company is a commonly used term in employment which is used to define the total cost an employer bears in hiring and retaining an employee for a specific period of time, mostly a year. It includes all direct and indirect expenses like salary, allowances, bonus and incentives, employee stock option (ESOP) and insurance coverage.

It is to be noted that CTC is not the same as net salary or take home salary that employee receives in hand. Take home salary is what an employee gets after deducting all the taxes, provident fund contribution and any other deduction.

Importance of understanding CTC for employees:

• Trust between employer and employee: If an employee is able to understand the complete breakdown of their ctc including the components like basic salary, allowances and benefits it helps build trust between employer and employee. Employees can see how open and honest their employer is about how compensation is calculated, they can understand the true value of their compensation and it motivates them to work harder and feel more satisfied in their roles.
• Financial planning: Knowing your CTC breakdown helps you to plan your finances better. Employees can budget their expenses, saving and investment more effectively on the actual compensation they receive.
• Negotiations and job offer: Knowledge on how ctc works help employees during job offer and negotiations. They can evaluate the overall offer made by the potential employer and can negotiate a higher salary based on take home vs ctc and make informed decisions about changing jobs or not.
• Employee benefits: CTC includes components like health insurance, retirement plan, ESOPs and other perks. Understanding the ctc helps employees to know what other benefits the employer is providing other than monetary incentives.
• Tax Planning: CTC includes taxable components and knowing how much to pay tax and on what amount helps employees in tax planning to optimize their tax liability and increase investment in tax saving options to grow their income.
• Employee Satisfaction: Knowing your CTC ensures that you are properly compensated for your work and contribution which leads to higher job satisfaction and motivation to work harder for bonuses and increment.
• Performance Evaluation: Employees CTC is directly related to their performance and skills they showcase in their job. Better performance directly impacts the total compensation and can be a motivating factor in achieving higher levels of productivity.

What does CTC include? 

Cost to company (CTC) includes all the direct and indirect expenses that employers incur on hiring and retaining an employee. While the specific components of CTC varied from company to company here are some of the components included in CTC:

• Basic Salary: This is a fixed component of the salary which does not include any additional benefits or allowances.
• Allowances: There are the components provided by the employer to cover specific expenses. It includes:
  House Rent Allowances (HRA): This is given to employees who do not receive any accommodation from the employer to cover their rent expenses.

1. Travel Allowances: This allowance is provided to cover the expenses borne by employees for commuting between home and workplace.
2. Medical Allowances: Provided by employer to cover medical related expenses.
3. Dearness Allowance (DA) Given to employees to help them cope with inflation.

• Bonus and Incentives: These are performance based incentives and incentives that employees received based on their individual performance or company performance.
• Retirement Benefits: These include contributions made by employers to employee retirement funds. It includes provident fund and employee provident fund or other pension schemes.
• Insurance Coverage: Companies also provide insurance coverage to its employees and their spouse such as health insurance, life insurance etc.
• Gratuity: It’s a lump sum amount paid to an employee as a form of gratitude for an employee’s long term service to the organization.
• Employee stock Option (ESOPs): Some companies offer their employees to receive stock options or equity in the company as part of its CTC.
• Other benefits: Organizations also include benefits such as meal allowances, mobile phone allowance, education etc.

What is the deduction from salary included in CTC?

Deductions are components that are subtracted from cost to company to arrive at net salary. These deductions include:

• Income tax deductions: These are the amount deducted from employee ctc based on applicable tax slab and income the employee falls under. The income tax is then deposited to the government on behalf of the employee.
• Employee provident fund: A percentage of the basic salary is deducted as EPF contribution and the same is also contributed by the employer which serves as a retirement savings for employees.
• Professional tax: In India employers levy a professional tax on salaried individuals. This amount is deducted from the salary and deposited to the respective state government.
• Insurance premium:  If the employee opt for covering additional insurance beyond what employer  provides and this extra amount is deducted from the CTC.
• Voluntary deductions: this include deduction made by employee to charity or additional contributions to provident fund etc.

How is Cost To Company(CTC) calculated in salary?

Here’s the formula for calculating the total cost to company for an employee:

CTC= Basic salary + allowances + bonuses + benefits (PF) + Insurance + other benefits

It is to note that CTC is the total cost incurred by the employer and it may be higher than net salary that employee takes home after deducting taxes and other components.

For example,

Below is an example table showing a hypothetical Cost to Company (CTC) breakup for an employee, with various components and their corresponding amounts in numbers:

Difference between gross salary and net salary?

Gross Salary: It is the total amount of money an employee is entitled to receive from its employer before any deductions. It includes all components such as basic salary, allowances, bonus and other benefits.

Net Salary: Also known as take home salary is the amount an employee receives after all deductions  and taxes have been subtracted from the gross salary. It is the actual amount employees receive for personal expenses and savings.

How to calculate net salary or In hand salary after deductions from CTC?

To calculate net salary you need to deduct various deductions including income tax, employee provident fund, professional tax.

Mathematically the formula for calculating net salary is:

Net salary= Gross Salary – (Income Tax + EPF + Professional Tax + other deductions)

How to calculate taxable income?

To identify taxable income you need to make a list of all sources of income you current have that are subject to taxation . To calculate taxable income, follow these general steps:

Identify Income Sources: Compile all sources of income you received during the tax year. Common income sources include:

• Salary and wages
• Business income (if self-employed)
• Rental income
• Interest income
• Dividends
• Capital gains
• Any other sources of income

Calculate Gross Income: Add up all the income from different sources to calculate your gross income for the tax year.

Deduct Exemptions and Deductions: Certain exemptions and deductions are allowed by the tax laws to reduce your taxable income. These may include:

• Standard Deduction (if applicable)
• Deductions under Section 80C (for investments like EPF, PPF, life insurance, etc.)
• Deductions under Section 80D (for health insurance premiums)
• Deductions under Section 24 (for home loan interest)
• Deductions for donations to charitable organizations, etc.

Calculate Total Taxable Income: Subtract the total exemptions and deductions from your gross income to arrive at your total taxable income.

Apply Applicable Tax Slab: Determine the applicable income tax slab based on your total taxable income and the prevailing tax rates for the tax year.

Calculate Income Tax Liability: Apply the tax rates of the respective tax slabs to your total taxable income to calculate your income tax liability.

Consider Rebates and Tax Credits: If you are eligible for any tax rebates or credits, deduct them from the income tax liability to arrive at the final tax payable.

• It’s essential to keep accurate records of all income and expenses, along with supporting documents, to ensure correct calculation and compliance with tax laws. Tax calculations can become more complex based on individual circumstances, additional sources of income, and specific tax laws of your country or region.

How EPF is calculated in CTC?

Employee Provident Fund (EPF) is a mandatory retirement savings scheme in India, and it is a part of the Cost to Company (CTC) for many salaried employees. Both the employer and the employee make contributions to the EPF. Here’s how EPF is typically calculated and included in CTC:

EPF Contribution Rate:

• The EPF contribution rate is set by the government and is subject to change. The current EPF contribution rate is 12% of the employee’s basic salary.
• Both the employee and the employer contribute an equal percentage (12% each) of the basic salary to the EPF account.

CTC Calculation:

• When calculating CTC, the employer includes the employee’s EPF contribution as part of the employee cost. This means that the employer adds the 12% of the basic salary (employee’s share) to the overall CTC.

Employer’s Contribution

• On top of the employee’s contribution, the employer also contributes an equal amount (12% of the basic salary) to the employee’s EPF account.
• However, the employer’s contribution is not directly added to the CTC because it is considered as a part of the company’s statutory obligation towards the employee’s retirement savings.

Total EPF Contribution:

• The total EPF contribution is the sum of the employee’s and the employer’s contributions.
• This total contribution (both employee’s and employer’s share) is deposited into the employee’s EPF account maintained by the Employees’ Provident Fund Organization (EPFO).

Impact of CTC on Employee Benefits and Perks:

The cost to the company plays a significant role in determining  the scope and level of benefits for the employees. The include:

• Determining benefits: CTC setups the overall compensation plan for the employees a higher ctc allows employer to provide more generous benefits such as better health insurances coverage, retirement plans, and wellness program.
• Health Coverage: A higher ctc allows employer to provide more better health service to employees which includes coverage for dependents, dentals care, vision and other benefits.
• Retirement Plan: The ctc impacts the contributions made by the both employees and employers towards retirement and a higher ctc ensures higher contribution and helping employees secure their future.
• Performance based incentives: This benefits include providing employees performance based rewards, ESOPs, commission or profit sharing. These incentives are used to motivate employee to perform better.
• Paid Time Off: CTC also influence the number of paid leaves and other leaves an employee will get in a year.
• Training and development: A higher ctc enables employee to spend more on upskilling and learning new skills to further boost their performance and take up more opportunity to grow in their career.
• Talent attraction and retention: Offering attracting CTC and remuneration can significantly attract new talents and retain valuable employees in the organization. A better ctc sets apart the organization from its competitors.