Finance

23 February 2022

When you hear the term salary, what is the first thing that springs to mind? Consider yourself a newcomer to the workforce who is about to begin their first job. You finally get that ideal job with a high salary after putting in so much work to prepare for that faultless interview. You’ve arrived at the pay negotiation. But wait, you don’t understand concepts like CTC, in-hand salary, basic salary, and how they work?

Don’t worry. We’ve got it all covered. Let’s start with the fundamentals.

What exactly is an in-hand salary?

Take-home pay, also known as in-hand pay, is the amount of money deposited to your account at the end of each month after all deductions have been made.

How is it calculated?

To put it simply, this amount is computed by adding your base pay and allowances and then subtracting the various types of taxes (income tax, EPF, professional tax)

Net Salary = Basic Salary + Allowances – Income Tax/TDS – Employee Provident Fund – Professional Tax

1. Basic salary: Also known as in-hand pay, this is a fixed component of your compensation that never changes.
2. Allowances: Employees get several sorts of allowances, such as home rent allowance (HRA), leave travel allowance (LTA), dearness allowance, children’s education allowance, etc. 
3. Income tax/TDS: The employer deducts the tax amount owed on your salary (based on the slab and rate of tax applicable) before handing over the salary to you. This tax is also known as tax deducted at source (TDS). 
4. Employers’ provident fund: This is an employee benefit plan administered by India’s Ministry of Labour. Typically, the employer contributes at least 12% of the employee’s monthly salary to their EPF account.

What exactly is CTC?

The Cost-to-Company, or CTC, is the total salary package of an employee that indicates how much an employer spends on an employee over the course of a year. It consists of basic salary, allowances, a provident fund, and additional benefits. In layman’s terms, this is the amount of money that the firm provides you as a wage package when you are hired for the position.

How is it calculated?

CTC is computed by adding the total cost of any supplementary benefits received during the service year to the employee’s salary. 

CTC =Gross salary + PF + Gratuity

1. Gross salary: Gross salary is the whole pay amount provided to the employee before deductions are known as gross salary. 
2. Provident Fund (PF): It is a government-managed retirement savings program for employees. Both employees and their employers are required to deposit 12% of the employee’s basic salary into their PF account.
3. Gratuity: Gratuity is the total sum of the amount paid by the employer to an employee at the time of retirement. 

How is in-hand salary different from CTC?

CTC contains numerous deductibles that are part of the overall compensation but do not get into the employee’s hands. In contrast, take-home pay is the amount that is eventually deposited in the employee’s bank account after all mandatory deductions such as PT, PF, TDS, etc.

To sum it up…

The numerous deductions from the gross income result in a significant discrepancy between the original CTC and the actual in-hand compensation. As a result, it is critical to understand your compensation structure and the many terminologies used to obtain an in-depth understanding of net or in-hand salary, gross income, and CTC as it is necessary to make sound financial decisions, such as tax-saving programs, trip planning, and so on.

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