Is CTC a Scam?

CTC is the most common word used by everyone. But, do we know what it is? Everyone knows CTC is the cost to the company, but we don't know how that is costing the company.

Terms like CTC, basic salary, gross salary, net salary, allowances, reimbursements, tax deductions, etc. often create confusion for the employees. In this article, I have aimed to describe all the terms related to salary to make it simpler for you.

Salary is a mixture of different components which come together & make CTC.

CTC

Cost to Company (CTC) is the yearly expenditure that a company spends (directly or indirectly) on an employee. CTC is inclusive of monthly components such as basic pay, various allowances, reimbursements, etc., and annual components such as gratuity, annual variable pay, annual bonus, etc. CTC in colloquial terms is the cost an employer bears to hire and sustain its employees.

How to calculate CTC?

CTC = Gross Salary + PF + Gratuity

Let us now discuss common CTC components:

Basic Salary:

Basic salary refers to the amount of money that an employee receives before any extras being added or payments are deducted. It is the base income of an employee comprising 40-45% of the total salary. It excludes bonuses, overtime pay, or any other potential compensation from an employer. Other salary components like Gratuity, Provident Fund, and ESIC are determined according to the basic salary.

Gross Salary:

Gross salary is the amount calculated by adding up one's basic salary & allowances before deduction of taxes & other deductions. In simple terms, it is the monthly or yearly salary before any deductions are made from it.

Gross Salary = Basic Salary + HRA + Other Allowances

Net Salary:

Net salary is the take-home salary of an employee. It is obtained after deducting income tax at source(TDS) & other deductions as per the company's policy.

Net Salary = Basic Salary + HRA + Allowances - Income tax - PF - Professional tax

Allowances:

An allowance is a fixed amount of money received by a salaried employee from his employer to meet a particular type of expenditure over and above salary. Allowances are treated as part of the salary. Some common types of allowances are discussed below:

• HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation. It offers tax benefits to the employees for the sum that they pay towards their accommodation every year. Salaried individuals residing in rented homes can claim this exemption & reduce their tax liability.
• Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover the domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel. The amount paid as LTA is exempted from income tax under Sec 10(5) of the Income Tax Act 1961. It should be noted that the employee can not claim LTA in every financial year. It can be claimed only for 2 journeys in a block of 4 years.

The current LTA block period is 2018-2021

• Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.
• Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. It applies to government employees, public sector employees, and pensioners only.
• Other such allowances are the special allowance, medical allowance, incentives, etc.

Reimbursements:

Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills, etc. The amount is not received in the salary, but on submission of the bills, reimbursement is given. Generally, there is an upper limit for every category of reimbursement.

Employer Provident fund/EPF or Provident Fund:

Employees give a portion of their salaries to the provident fund and employers must contribute on behalf of their employees. The money in the fund is then held and managed by the government and eventually withdrawn by retirees.

Provident fund contribution is mandatorily either of the following:

Case 1: Basic salary < 15000 (per month)

12% of the basic salary

Case2: Basic salary > 15000 (per month)

In this case, the company has an option to either contribute 12% of 15,000 (i.e. 1800) or 12% of Basic salary.

It is directly deposited in the employee’s PF account.

Hence, 12% of the basic salary gets contributed by the employee and another 12% by the employer. Usually, the contribution from the employer can only be seen in your offer letter and not in the payslip. Contribution from your salary is called EPF and it can be seen in the payslip. Contribution to the provident fund is mandatory for Indian companies.

Public provident fund or PPF:

PPF is a voluntary contribution by the employee and is completely controlled by him/her. The employer has nothing to do with a PPF account.

This amount is not mentioned in CTC or payslips, however, if an employee presents it as an investment for tax saving purposes, it will be shown on Form 16.

People open PPF account for two main reasons:

• Tax saving purposes
• Long-term investment.

Earlier PPF was providing 7.6% per annum (compounded annually), but now they have revised the % to 6.4%.

Both the contribution and maturity amount is tax-free. Do not confuse this with the Employer's PF contribution.

Form 16:

The company issues a Form 16 which contains the details about the salary earned by the employee and the amount of tax deducted.

The taxpayer is required to submit Form 16 to file the Income Tax returns every financial year. It acts as proof of his/her income and tax paid to the government.

Gratuity:

Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job. Though an employee can receive the gratuity amount only after 5 years. However, it can be paid before the completion of five years in case of the death of an employee or if he has become disabled due to an accident or disease. It will be deducted by the employer every year and hence it will get deducted from your CTC.

"According to Sec 4(2) of the Payment of Gratuity Act that for every completed year of service above six months, the employer shall pay gratuity to an employee. That means if an employee works in the establishment for more than 6 months in a year, he shall be eligible to get gratuity at the prescribed rate. So, if an employee completes 4 years and 6 months of continuous service in the same establishment, he/she is eligible to get gratuity."

Life insurance and health insurance:

Many companies provide health insurance and life insurance to their employees, the premium for which is borne by the employer and is included in the CTC. Hence it has to be deducted while calculating your take-home salary.

Income tax:

The tax levied on one’s income is called income tax. Usually, an employee gets his or her salary after the tax deduction by the employer. This process is called Tax Deduction at Source (TDS). The deducted tax amount is paid to the government by the company.

Professional tax:

Professional tax is the tax charged by the state government to let an individual practice a certain profession. The maximum amount payable per year is INR 2,500. It depends on one’s monthly salary and also on the state in which one works. The professional tax levied varies from state to state in India.

Some common queries:

1. When and how much gratuity do you get paid?

In India, the basic requirements for gratuity are set out under the Payment of Gratuity Act 1971.

Note: To fall under the Act and qualify for gratuity, an employee needs to have at least five full years of service with the current employer, except if an employee passes away or is rendered disabled due to accident or illness, in which case gratuity must be paid.

Gratuity = [ (Basic monthly salary + D.A) x 15 days x No. of years of service ] / 26

Here, the basic monthly salary is the last month's basic pay at the time of leaving.

2. How to see my PF Balance?

Follow the below-given steps for downloading the UAN passbook.

This facility is to view the Member Passbook for the members registered on the Unified Member Portal. Passbook will be available after 6 Hours of registration at Unified Member Portal.

1. The first time when you log in to the above website it will show an Invalid login credential. Then try after 2 days. When you will log in after 2days it will show passbook will be available after 4days. After 4 days when you will log in download a passbook copy.

· Your Username would be your UAN number (It is printed on your salary slip)

· Password (which is you have generated at the time of UAN activation)

3. What is the difference between Financial Year and Assessment Year?

Financial year (FY)

A financial year is a year as reckoned for taxing and accounting purposes. It commences from April 1 of a year and ends on March 31 of the following year. In the case of filing IT returns, the financial year is the previous year. It is the year in which one has earned the income. Hence, if you are filing a return this year, that is 2018, the financial year will be 2017-18.

Assessment year (AY)

Assessment year, on the other hand, is the year in which you file your returns. It is the year in which the income that you have earned in the financial year will be evaluated. For example, if you have earned your income between 1 April 2019 and 31 March 2020, then 2020-2021 will be the Assessment Year. Hence, it is the year in which your tax liability will be calculated on the previous year’s income.