Take Home, Net Gross Salary vs. CTC

This page will briefly explain the different aspects that define your salary and the differences between them.

What is Gross Salary?

Gross Salary refers to the total amount paid to an employee before deducting taxes or other deductions. It includes components such as gratuity and the Employee Provident Fund (EPF), subtracted from the Cost to Company (CTC).

Below is the bifurcation of each

1. Components of Gross Salary:

   • Basic Salary: The core amount paid to an employee, excluding bonuses, overtime, or other allowances.

   • Bonuses: Additional payments provided to employees, often linked to performance, holidays, or special occasions.

   • Overtime Pay: Compensation for extra hours worked beyond the standard working hours.

   • Holiday Pay: Remuneration for work performed during holidays or non-working days.

   • Perks: Additional benefits, such as housing, medical assistance, child's education, and insurance support.

2. Employee Provident Fund (EPF):

   • EPF is a significant component of Gross Salary, established as an employee benefit scheme authorized by the Ministry of Labor.

   • The Employee Provident Fund Organization (EPFO) governs policies related to pension, EPF, and insurance schemes.

   • Employers contribute a minimum of 12% of the employee's salary towards their EPF, ensuring financial security for the employees.

   • The EPF serves various purposes, including medical assistance, child's education, housing, and insurance support.

3. Withdrawal of EPF:

   • Employees have the option to withdraw the accumulated amount in their EPF account under certain circumstances, such as retirement, termination of services, or migration for employment abroad.

   • Complete withdrawal is permitted at the time of retirement or under specific conditions like permanent disability or termination of services.

4. Gratuity:

   • Gratuity is a token of appreciation from employers to employees for their long-term association with the company.

   • It is typically provided to employees upon retirement, job change, termination, or voluntary retirement.

   • As per section 10(10) of the Income Tax Act, employees become eligible for gratuity after completing five years of service with an organization.

What is NET Salary or Take Home Salary?

Net Salary, also known as Take Home Salary, refers to the amount an employee receives from their employer after various deductions, including taxes. It represents the actual income that an individual takes home, considering factors such as Provident Fund, Professional Tax, and Income Tax.

The formula to calculate Net Salary is straightforward:

Net Salary = Gross Salary−Provident Fund−Professional Tax−Income Tax

Let's break down the components:

• Gross Salary: The total salary an employee earns before any deductions.

• Provident Fund (PF): A mandatory deduction comprising contributions from both the employee and employer. It serves as a long-term savings plan for employees.

• Professional Tax: A state-level tax imposed on income earned by salaried individuals. The amount varies across states.

• Income Tax: Calculated based on the employee's income and the applicable tax slab. Individuals with a salary up to Rs. 5,00,000/- p.a. may be eligible for rebates under section 87A, up to Rs. 12,500/-. This rule is applicable for both tax regimes, new & old.

Illustration 

Let us assume Mr. Dhruv falls between the salary range of Rs. 2,50,001 – Rs. 5,00,000 and comes under the 5% tax slab.

Mr. Dhruv's income is Rs. 3,60,074.

Mr. Dhruv would not need to pay any taxes. As up to Rs. 5,00,000 income, an individual is getting a tax rebate under section 87A up to Rs. 12,500 or any amount lower than that.

Therefore, Mr. Dhruv's income after taxation and other deductions would remain the same as Rs. 3,60,074.

It's essential to note that besides statutory deductions, there may be other voluntary deductions such as health insurance premiums or other benefits, which can further impact the net salary.

What is The Cost to Company (CTC)?

CTC salary means the amount that is pre-decided by the company while recruiting an employee. The cost to the company includes numerous other elements and is accumulative of the Provident Fund (PF), and the allowances such as House Rent Allowance (HRA) and medical insurance to the basic salary. Basically, the total cost to the company is the combination of all these elements. In simple words, CTC salary means the company is spending on recruiting and sustaining the service of an employee.

CTC is evaluated as variable pay as it is based on different factors, and thus the take-home salary and the net salary of an employee varies when the CTC varies from employee to employee.

For Example-

Let's assume Mr. Ashit has been required by the company and at a CTC of Rs. 4,00,000. We have illustrated his income breakdown below to explain his CTC.

Basic Salary- Rs. 2,20,000

HRA-Rs. 88,000

CA-Rs. 19,200

Medical Expenses- Rs. 15,000

EPF contribution- Rs. 21,600

Gratuity- Rs. 18,326

Special Allowance- Rs. 17,874

What are the Elements of Cost to Company?

The Cost to Company (CTC) typically encompasses the overall compensation package, comprising Direct benefits (the amount directly paid to the employee annually), Indirect benefits (the amounts the employer pays on the employee's behalf), and savings contributions (the savings schemes available to the employee). The formula for CTC is: 

Cost to Company = Direct Benefits + Indirect Benefits + Savings Contributions

The components of the Cost to Company are briefly outlined in tabular form for clarity.

For your convenience, we have further discussed every single component of the CTC breakdown:-

• Basic Salary- The basic salary differs from CTC. The basic salary of the employee remains constant and does not vary. The total amount of your basic salary is part of your take-home salary.

• Allowances- Allowances are part of your salary structure provided to the employee that helps them to take care of all the basic needs. These include:-

  • House Rent Allowance (HRA) – House rent allowance is a part of the cost to the company an employer pays to its employees. The employee can avail of tax benefits with HRA if employees pay for rent annually. The least of the following would be HRA exemption from tax:

    • HRA received from your employer

    • Actual rent paid minus 10% of salary

    • 50% of basic salary - In metro cities

    • 40% of basic salary - In non-metro cities

  • Leave Travel Allowance (LTA) - Leave travel allowance is another tax benefit component of CTC that the employers provide to the employees to cover the expenses of travel anywhere within the country. Besides this, the employee should keep in mind that the LTA only covers only travel allowance. Other expenses like drinks, food, etc. are not covered under LTA.

  • Dearness Allowance - Year after year, inflation is rising, and to tackle this issue, dearness allowances are offered to the employee. Dearness allowance is basically an adjustment of the cost of living given to reduce the inflation effect on the economy.

  • Other allowances that are part of the cost to the company are vehicle, medical, incentives, mobile phone, and special allowance.

Wrapping up!

If you are a salaried employee, then understanding what gross salary is, what CTC means, and the net salary concept is crucial. Refer to your offer letter to gain insight into your overall compensation package. It's important to note that gross salary and CTC are interchangeable terms, signifying the same thing.

Therefore, comparing your gross salary to your net salary is essential for understanding your take-home income and clarifying these concepts.