Understanding CTC, Salary Structure, and Legal Implications in Employment Contracts

I have recently joined a small software company. While negotiating the salary, the figure quoted to me was Rs.15,000/- per month. When asked what I wanted my "take home" to be, I asked for the maximum. So, after all possible deductions, the "take home" figure given to me was Rs.14,200/-.

However, I was in for a shock when my first paycheck came. My "take home" was not Rs.14,200/- but Rs.13,320/-. When confronted, the HR personnel just shrugged his shoulders and said that my salary structure had clearly been mentioned in my appointment letter.

My salary structure in my appointment letter looks exactly as follows:

Basic 7000.00

HRA 2960.00

Medical Allowance 1800.00

Education Allowance 800.00

Travel Allowance 800.00

Lunch Allowance 800.00

P.F. Component Paid

By Company 840.00

CTC (Rs.) 15000.00

So it is evident that PF is being deducted twice from my salary.

Is it legal to quote only CTC in the appointment letter instead of the actual salary in the salary structure? Also, is it legal to quote the company's contribution of provident fund in the salary structure as a part of the salary?

I have also signed a bond that requires me to stay in the company for at least 1 year. However, this bond is meant for a technical employee and implies that the employee is a technical person. I am a non-technical employee in a non-technical department.

Can this bond be legally binding to me as well?

I would really appreciate it if someone would advise me on these subject matters. This is the first time that I am facing issues like these.

Thank you all in advance.

This is a normal practice in CTC, i.e., employees pay both components of PF. In case you don't want PF at all, then the alternative is to leave the company and rejoin (this is also normal).

Surya

Hi,

Do not panic. It is true that your PF is being deducted two times. You have already explained this on paper to your HR as well as the accounting department. It may have happened by mistake. You can also talk to your senior regarding this.

Wishing you all the best,

Meha

Hi, nothing, your PF is not being deducted twice. Companies include their contribution as a part of CTC.

Look, it works like this:

Basic: 7000.00 - this you will get in payslip/salary

HRA: 2960.00 - this you will get in payslip/salary

Medical Allowance: 1800.00 - this you will get in payslip/salary

Education Allowance: 800.00 - this you will get in payslip/salary

Travel Allowance: 800.00 - this you will get in payslip/salary

Lunch Allowance: 800.00 - this you will get in payslip/salary

P.F. Component Paid by Company: 840.00 - this you will not be paid monthly, but every month an amount of Rs. 840 from the company's side + Rs. 840 from your side, i.e., from the above total of BASIC to LUNCH ALLOWANCE, is deposited by the company to the PF OFFICE.

This you will get when you withdraw PF. So every month an amount of Rs. 1680 is being deposited in the PF office, in your name, which you will get afterward when you resign or transfer the PF.

So your total take-home monthly comes to:

BASIC till LUNCH allowance - PF Rs. 840 - Any taxes if applicable (e.g., P.TAX)

= 14160 - 840 - other taxes/deductions

= 13320 Rs. - other taxes/deductions is your take-home per month.

Hope you got it clear now.

Dear Radha,

Ravi has explained it very well. Always remember that CTC is the cost to the company, i.e., the cost that the company bears because it wants to avail your services.

Therefore, there are some costs that the company has to bear for you, either due to statutory requirements or as a gesture of rewarding your good service for the company. These costs are also included as part of the CTC.

According to the PF act, both the employer and the employee contribute 12% of Basic+DA. Thus, the employer's contribution is also shown as part of CTC because the company pays it for hiring you.

In your salary slip, only one PF deduction is shown, which is your contribution to your PF account. The employer's contribution is not deducted from your salary but is separately contributed by the company.

Apart from these, there are other deductions from the salary like Professional Tax (if applicable), Income Tax, and also some contribution towards a common fund maintained by the company (if the company does so). After deducting all these, the in-hand salary is determined.

Hence, the crux is that the in-hand salary is always less than the CTC.

Regards,

Nilendra

Hi Kandan,

What about Bonus and Ex-gratia? Are these two a part of C.T.C? Please clear my doubt.

Thank you.

Bonus or Ex-gratia normally does not form part of CTC (as eligibility is a maximum basic + DA of Rs. 10,000). Also, the amount paid varies from 8.33% to 20% of Basic + DA.

Normally, for the so-called management staff, companies pay performance bonuses. It can be or can't be part of CTC. This depends upon the company. It's debatable.

Regards,
Nilendra

Hi,

CTC (in Common Parlance) is normally viewed as the costs incurred for salary, perquisites, amenities (canteen, uniform, etc.), and contributions to social and retiral funds. So, it is right in your case that the PF contribution from the employer is added to your CTC.

Regards,
Balaji

What percentage of CTC comprises the Basic salary? Is it the same or nearly the same for all the companies, or can it vary from company to company or employee to employee?

Thank you.

What if at the time of joining the company, we are not explained about the CTC structure, and only after receiving a few salaries, we come to know that the in-hand salary is too less than our expectations. Can we take legal action against it or how can it be resolved?

Hello,

CTC, as the very name indicates, is "Cost to the Company" for employing the concerned person. It is NOT "salary" since canteen, transport facilities, and other welfare activities the company conducts for employees do cost the company but should not be termed as part of the salary. Salary is what an employee receives on a fixed basis, whether monthly or annually. To that extent, professionally speaking, even the "incentives or performance bonuses" may be costs to the company but are not salary since these are conditional payments based on how the employer views the employee's performance. There is nothing wrong with installing a variable pay component in the CTC. My objection is that such payments are being termed Salary, especially when companies equate CTC with Salary. If the company shows Rs. 50,000/- as annual performance pay (where the candidate does not know the rules or norms or targets) and he ends up receiving, let's say, just Rs. 20,000/-, he is BOUND to feel cheated. The worst part is it is not as though the employer cannot or does not see such a possibility!

Salary is what you pay an individual employee for doing a certain amount of work in a specified timeframe (like 48 hours a week). There is an assurance about this money coming to the employee's account if he works diligently. Variable pay is an incentive for improved performance. What is actually paid as an incentive/performance bonus/variable pay MAY be called salary ONLY after these are paid. But to include a certain hefty sum on the CTC, negotiate the same as salary, and when the employee does not get the same in hands (even due to his lack of qualifying performance to earn that higher amount), there is bound to be serious disillusionment and the beginning of a feeling of having been short-changed by the employer. Such practices and feelings are a substantial cause for attrition, even though leaving employees may not admit so explicitly!

The other part of the question concerns when the candidate knows about "salary" while finalizing the job and in the offer or appointment letter only comes to know that the figure he was told to be the salary is, in fact, the CTC. By the time this dawns upon him/her, it is perhaps too late to put foot down! All I can advise is that one should work on a crystal clear definition of these terms and should not hesitate to seek clarification before making up the mind to accept the job. Else, he will have ample time to repent the haste!

Both terms are poles apart in meaning and content and need to be understood without an iota of doubt. For the employer, CTC is the correct way to look at the employee costs and a very wrong way to treat it as salary. I have failed to understand why employers cannot work on two figures, at least for the satisfaction of the candidate and for a stable relation. Not doing this cuts the very foundation of trust, credibility, and transparency!

As candidates, the least we can do is to NOT get enamored with high figures being shown as salary and accept the same blindly. But often the lure of money, position, and the employer's brand value prompt commitment to this fatal error. Let us guard against it!

Regards,
Samvedan
October 20, 2008

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"What if, at the time of joining the company, we are not explained about the CTC structure, and only after receiving a few salaries, we come to know that the in-hand salary is too less than our expectation? Can we take legal action against it, or how can it be resolved?"

Thank you, Samvedan, for your detailed reply. However, what we would like to know now is what can be done legally or mutually so that our in-hand salary could be increased, and we do not feel cheated.

Regards,
Prajakta