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Understanding and Calculation

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RAAG VAMDATT FEATURED IN

October 21, 2009 by Raag Vamdatt

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About the Author

What is Cost to Company or CTC salary? How is it calculated?

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If your CTC package is so high, why do you get so little in

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hand? This article explains it all.

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Y our company offered you a salary of Rs. 6 Lakhs per year.

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That means you should be getting Rs. 50,000 in hand every

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month. Even if you consider income tax, you should be getting

about Rs. 40,000 in hand.

WHAT READERS HAVE TO SAY

I read your website regularly and

But you get only Rs. 32,000 in-hand every month! Why?

apprciate the way you explain things.

Where did the promised money vanish? Is your company

Clarity is the essence of your website.

cheating you?

Mohan

No! It is because the company promised you the salary as Cost

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to Company, or CTC.
So, what exactly is CTC?

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Your Provident Fund (PF)
account balance now
available online
Income Tax (IT) Benefits
of a Home Loan / Housing
Loan / Mortgage
Saving Income Tax

The concept of Cost to Company

(CTC)
Simply speaking, CTC is the amount that you cost your
company. That is, it is the amount that the company spends
directly or indirectly because of employing you.
Thus, it is the money given to you (your in-hand component),
plus the money spent because of you.

Understanding Section

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Understanding Section
80C Deductions
Cost To Company or CTC

Y oull understand this better while we discuss the various

components of your CTC salary, so lets jump into it right

salary: Understanding

away! We will also use an example parallel to the discussion, so

and Calculation

that you can understand the concept of CTC better.

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Long Term and Short

Term Capital Gain
Income Tax Calculation
Budget 2010-2011: Service
Tax on Property / House
/ Apartments / Flats
Provident Fund (PF) and

Components of Cost to Company

(CTC) Salary

Voluntary Provident Fund

In Understanding components of your salary, we saw

(VPF)

the various components of your in-hand salary.

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Basic

Income Tax (IT) treatment

Dearness Allowance (DA)

of House Rent Allowance

Incentives or bonuses

(HRA)

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Medical allowance
Leave Travel Allowance or Concession (LTA / LTC)

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available online

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Vehicle Allowance
Telephone / Mobile Phone Allowance
Special Allowance

Cost To Company or CTC

salary: Understanding
and Calculation

Income Tax (IT) Benefits

All the above are a part of your in-hand salary, and therefore,
are a part of your CTC pay as well.

Example

of a Home Loan / Housing

Lets understand this using a simple example. Say your basic is

Loan / Mortgage

Rs. 15,000 per month, DA is Rs. 10,000 per month, you get

Budget 2010-2011: Service

Tax on Property / House
/ Apartments / Flats

51

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House Rent Allowance (HRA)

Your Provident Fund (PF)

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Conveyance allowance

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conveyance allowance of Rs. 800 per month, and you get HRA
of Rs. 4,500 per month. So, your package so far is Rs.
3,63,600 per year.

Saving Income Tax

Understanding Section
80C Deductions

48

Fixed Deposits (FD) for

Now lets look at some of the other components of your CTC

pay the parts that inflate your CTC package but may not be
actually given to you!

saving income tax

through section 80C

43

An introduction to
Recurring Deposit

38

Long Term and Short

Companys contribution to
Provident Fund (PF)

Term Capital Gain

It is mandatory for you to contribute 12% of your basic

Income Tax Calculation

towards provident fund (PF). Y our employer makes an equal

34

contribution (12% of your basic) to your PF account.

Income Tax (IT) treatment

of House Rent Allowance
(HRA)

32

Deduction for rent paid

Section 80GG

28

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(Please read Provident Fund (PF) and Voluntary

Provident Fund (VPF) to know more about provident
fund)
So, although this amount is not given out to you every month,

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28

for your company, it is an expense that it incurs on you every

month! Therefore, this forms a part of your CTC pay.

Example
12% of your basic is Rs. 1,800 per month. That is, Rs. 21,600
per annum. Y our CTC package becomes Rs. 3,85,200.

Reimbursements
Various reimbursements that you get from your company can
also form a part of your CTC package.
This includes reimbursement of:
Medical bills
Phone bills
Magazine subscriptions
Book purchases, etc.

Example
Say you get reimbursement of medical bills of upto Rs. 15,000.
So, your CTC package becomes Rs. 4,00,200.

Life Insurance and Health

insurance
Most respectable employers provide free health insurance cover
to their employees and their dependents. Some companies also
provide life insurance for their employees free of cost.
The premium amounts paid for such insurance on your behalf
can be included in your CTC salary.

Example
Say you get a health insurance cover of Rs. 1 Lakh for yourself
and your family. The premium for this is Rs. 2,000. Thus, your
CTC package becomes Rs. 4,02,200.

Medical Facilities
Many companies have in-house health centers, hospitals or
other health care facilities where medical care is provided free
of cost to employees.
Companies work out a per-employee cost for such facilities,
and can include that in your CTC pay package.

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Transport Facilities
Many companies provide free transport facility to their
employees from their place of work to the job location.
The cost of such transportation can be added to your CTC
package.

Subsidized Meals
Many companies run canteens or cafeterias for their
employees, which provide subsidised meals to the employees.
Such subsidy can be included in your cost to company package.

Example
Lets say your company provides you lunch for Rs. 10, and the
actual cost of that lunch is Rs. 25. Thus, there is a subsidy of
Rs. 15 per meal.
For 21 working days in a month, this is Rs. 315. Or, Rs. 3,780
per year. Thus, your CTC package becomes Rs.
4,05,980.

Taking it too far

The components of your CTC salary sound reasonable so far,
right? After all, this is the money that you get in one form or
the other.
But some companies take the concept of cost-to-company too
far! Look at the following:

Office phone bill

The bill for the office phone that you use can be included in
your CTC salary too.

Office space rent

Shocked? Its true! There are many companies especially
large investment banks that include your office space rent in
your CTC package!! Y es, it defies logic, but it is true!

Example
Lets say your office is in Churchgate in Mumbai. Y our have a
small cubicle, say 6 feet by 8 feet (48 square feet). Lets say the
going rate for rent for office space in that area is Rs. 200 per
sq. ft. per month.

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What is the cost of your cubicle in that case? Its Rs. 200 * 48 =
Rs. 9,600 per month, or Rs. 1,15,200 per year.
When this is included in your CTC, your overall CTC
package becomes Rs. 5,21,180!

A side note: Remember this when you read about the

whopping, exorbitant salaries paid out to fresh management
graduates (Like the IIM Ahmedabad MBAs)! Their large
salaries might include the office space rent as well!!

A note on government salaries

We often hear people say that the salary of government
employees is quite low.
Although there is truth in this, government salaries wouldnt
seem too less if we look at it from a CTC point of view.
When we talk about government salaries, we only talk about
the in-hand component. But we forget that on a cost-tocompany basis, it can be quite substantial.
What extras do government servants get? Heres a sample list:
The 12% of basic that the government deposits in their PF
accounts, just like private companies
Membership of government clubs or gymkhanas
Free stay at various circuit houses and government guest
houses
Free telephone connection at home
Free car with driver
Reimbursement of newspaper bills
Free use of many libraries
In case of defense personnel (Army / Navy / Air Force), a
huge subsidy on items bought from their canteens (like
groceries, appliances, etc.)
When these things are taken into account and salaries of
government employees is considered on a cost to company
(CTC) basis, it wont seem too less compared to the private
sector!
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Vikas Kumar
Engineer at NoT yeT w oRkiNg !! iM stiLl stUdYinG !!hehe, im still youth

i need to work more hard

Like Reply May 25, 2015 5:26am

Ruth Lungu
Pretoria, South Africa

Thank you very much for the information it was easy and straight forward to understand.
Like Reply May 19, 2015 6:20am
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