Many Of Us having confusion regarding Salary, Net Salary, Gross, Cost to Company they are same or different. I Hope this may help you in clearing you doubts. I shall try to cover what makes the salary? What is the difference between Salary, Net Salary, Gross Salary, Cost to Company.
How people earn money?
The three broad ways in which people earn money are as follows:
1. Working for someone else or Employee
2. Working for themselves or Self Employed
3. Running a Business.
When a person works for someone else or company, he/she is then said to hold a job and is called Employee. The person or the company he or she works for is called Employer.
“Money that is paid is called as Salary or Income or Wage”
#Salary- Money that is received under Employer-Employee relationship is called as Salary. If one is freelancer or are hired by an organization on contract basis, their income would not be treated as salary income. (In such case your income would be treated as income from business and profession).
Did you know that word salary has come from Latin Salrium based on Salrius which means pertaining to salt. The word appeared in 1350-1400. In those days, salt, regular ordinary table salt was a prized and valuable commodity. It was money given to Roman soldiers to buy salt. The phrases the salt of the earth or worth your salt refers to the high value of salt.
The salary consists of following parts
#Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure. It is a fixed part of one’s compensation structure.
#Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children’s Education Allowance, and City compensatory Allowance etc.
#Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on
Deductions: Two type of deduction are made from salary
Compulsory deduction such as Provident Fund, Income tax, Professional Tax (where applicable) .
Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc
Provident Fund Contribution
Provident fund contribution has two sides – the employer’s contribution and employee’s contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund (PF) account and paid to employee when he retires or resigns. There is also employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can read Provident Fund (PF) and Voluntary Provident Fund (VPF)
Different types of salary
Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to employee .i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
The phrase "Cost to Company" or CTC, as it is commonly known, means different figures to different people.
-For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.
-For employees, Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash.
-For the Finance Manager it is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation.
• Recruitement Cost
• Base salary
• Office Space
Components of CTC
• Salary like Basic, DA, HRA, Allowances
• Perquisites and Reimbursements given to employees (i.e.) - bonus, incentives, reimbursement of conveyance/medical/telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc.
• Contributions that the company makes for the employees like PF, Super Annuation, Gratuity, Medical Insurance, etc.
• Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions
• Tax Benefit on Stock Option plans only.
Difference Between CTC & Take Home Salary
And for most people it is plain confusion! This confusion prevails even now amongst the older employees. Most of us do not understand that there is a big difference between the follwing.
• Gross salary
• Net salary (Take Home Salary)
Cost to company (CTC) is the total cost that an employee is incurring in a company. Gross Salary is the one which you see every month. But this is before any deduction.Net Salary is what an employee get to his/her hand after deductions.(this is the take home salary)
The relation between all three
• Gross = CTC - Other benefits
• Net = Gross - Deductions
While switching jobs, people end up thinking that a hike on CTC as shown on the offer letter will increase the in-hand salary, But there are various components of the CTC that affect your in-hand salary.Some of these components inflate your CTC but you do not get them as a part of your monthly pay.
1. Basic Salary: Basic salary is a fixed part of your compensation structure and the complete amount becomes a part of your in-hand salary.
2. Allowances: Apart from the basic salary, there are some allowances that your CTC will contain. Examples include HRA, conveyance allowance, leave travel allowance. Some of these allowances are tax free up to a certain limit and some of them are dependant on your actual spending.
3. Claims: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance etc. There is a maximum limit set to these components and are paid when you submit your bills. These are usually tax free.
4. Deductions: A major part of your CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
5. Performance linked pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of target, but it forms a part of your CTC, fattening it up.
6. Taxes: Taxescause further leaks in your salary.Taxes are an unavoidable evil and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter.
Conclusion- Guys when you receive a good offer consider all these components separately and understand the impact they will have on your in-hand salary before deciding to take up that alluring offer. Also ensure that you have calculated your tax liabilities with the new income in accordance with the tax policies to figure out the amount you will receive in your pay cheque.
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