The nine crucial components of your Salary Break-up
- CTC or Cost to Company
- Basic Salary
- Provident Fund (PF)
- Net Salary
- Gross Salary
Doesn’t it feel amazing, when after months of job search and going through innumerable interview rounds you finally have the offer letter in hand? However, more often than not, for a new recruit who has just started working, understanding what each component means in financial terms is not easy.
When searching for a new job, getting through the interview is just one of the many steps before you finally clinch that position. A crucial discussion is that of salary. What as job seekers we often fail to realize is that it is not just a matter of quoting a figure.
It is often a combination of variables and calculations. Understanding how your salary is distributed will helps you negotiate your salary better.
Let’s look at what each of the terms that make up a salary, actually mean:
Cost-to-Company or CTC
The Cost-to-Company or CTC is the total amount that a company spends on you, directly or indirectly. It includes basic pay, allowances, provident fund, and others. In simpler terms, this is the amount that the company offers you as a salary package when employing you for the job. However, it is not that same as the amount that you take home at the end of each month.
CTC= Gross Salary + PF + Gratuity
Basic salary acts as your base income and is the fixed part of your compensation package with the exclusion of benefits and bonuses. The amount of basic salary varies depending on your designation and industry, but commonly it is set at 40 – 60% of CTC.
A monetary benefit provided by the employer to meet the expenditures incurred by you to meet the service requirements is called an allowance. These are usually provided in addition to the basic salary. The most common form of allowances is dearness allowance (DA), house rent allowance (HRA), leave travel allowance (LTA), and conveyance or transport allowance. Again, the amount of these allowances might differ from company to company depending on its policies.
A bonus is usually awarded in recognition of your good performance. It is compensation over and above the basic salary. The amount of bonus can either be fixed or variable and the time period in which it is due varies from different for different companies.
Provident fund (PF)
A scheme that benefits you after your retirement, the provident fund is an investment which is made by you and the employer every month. This amount is commonly calculated at 12% of your basic salary when it is up to Rs. 15000 and is directly transferred to your PF account. In case it exceeds the given threshold amount, the company may still choose to retain its share at 12% of Rs. 15000.
The benefit of insurance is provided by many companies but not all. A small amount is deducted from your salary each month which then goes towards your life and health insurance. The premium is deducted from your salary each month. This amount is included in the CTC but is deducted from your net salary.
The final contribution made out of your salary is towards the section of income tax and professional tax. The tax amount due on your salary (according to the slab and rate of tax applicable) is directly deducted by the employer before handing over the salary to you. This tax is also called the tax deducted at source or TDS. Other than income tax, the professional tax is another form of deduction made from your salary.
Net Salary or Take Home Salary
Finally, the salary that you take home with you is the net salary. To simplify, this amount is calculated by adding your basic salary and allowances and then deducting the various forms of taxes (income tax, EPF, professional tax) therefrom. Giving out the most realistic image of your income, this is the actual amount that is credited to your bank account at the end of every month.
In a nutshell, Net Salary = Basic Salary + Allowances – Income Tax/ TDS – Employer’s Provident Fund – Professional Tax.
Add the allowances to the basic salary and you arrive at the gross salary. This amount is calculated before the application of taxes and other deductions.
Gross Salary= Basic Salary + Other Allowances
Once recognized, the salary structure is easy to comprehend and even easier to negotiate. The primary goal of negotiating a salary is to gain maximum monetary benefit for the services provided by you in a tax efficient manner.