Understanding CTC Components: What Are the Legal Requirements and Differences from Gross Salary?

Dear All,

What should be CTC components? What are the laws for the different components of CTC? What is the main difference between gross salary and CTC?

Your prompt reply will be highly appreciated.

Gambhir

Hi,

CTC means Cost to Company; it can be split by month-wise and per annum-wise. For this, we need components working like Basic + HRA + medical + conveyance allowance + professional benefits + Sodexo coupons = Total (A). Bonus 8.33% on Basic (B) + statutory Terminal benefits (Company's contribution to P.F, gratuity Provision) (C).

Total Cost to Company (A + B + C) = XXXXXX.

Usha

There is nothing called CTC as per law. I have attached an Excel file for calculating CTC. You can modify, add, delete, or change the formula for your requirements. CTC should include all components that are spent on an employee.

Siva

Dear Kumar,

I think gratuity is a part of CTC. If an employee completes 5 years, gratuity will be paid by the company, so it can be a part of CTC. But all depends on the company policy.

One observation I have in the Excel sheet is that the conveyance is 10%, whereas ideally it should only be $9,600 annually as the maximum allowed for income tax rebate.

Hi all,

Point No. 1: Gratuity is part of CTC. In fact, I used to add even travel costs, lunch expenses, etc. It depends on how an organization sees it. But it is better to show all.

Point No. 2: This is just a fictitious calculation, so don't give importance to the percentage I have shown against HRA, DA, and conveyance. In fact, I have not shown superannuation and performance payments. One has to keep an Excel sheet like this for every position and grade. Many big organizations follow this method, and there are standard formats available if you use SAP or PeopleSoft.

Siva

Dear Siva,

You have calculated the gratuity amount in CTC incorrectly. Gratuity should be based on basic + DA only, not on HRA and bonus. Please review the attached file.

Regards,
Rajnish

If I have calculated Gratuity and bonus on Basic, then it is wrong. These components must be calculated on Basic plus DA.

Regret for the error.

Siva

Dear All,

Wishing you and all the members of CiteHR network a Very Happy, Bright, Successful, and Prosperous New Year - 2008.

For computing CTC at the time of negotiation for hiring a person, Gratuity cannot be part of CTC. However, after completion of 5 years of service, it is considered and posted as a liability in the company's Books of Accounts. So, for any HR calculations too, after 5 years of service, you may add it to CTC.

Rest all the payments/expenses borne by the Company for an Employee, such as Employer's PF share, ESI share, Statutory bonus (if applicable), Telephone reimbursement, Car maintenance and petrol expenses, canteen subsidy, or any other fixed payments/expenses paid in terms of remuneration, are to be included in CTC. Variable payments like incentives, festival/production bonus, sales incentives, tour expenses, etc., are not supposed to be part of CTC.

Parwez

Hi,

I need to calculate department-wise CTC. Please help me and guide me with the above. What are the basic components that I should include when calculating Departmentwise CTC, and what is the procedure for that?

Thank you.
Cheers,
Pankaj Hirani

Hi,

The appointment letter with the CTC becomes a contract of service. In one case, the person leaving employment after one year of service was denied payment of 'gratuity' (4%) on the plea that he had not completed five years of service. The employee challenged the action of the management and argued that it was part of the agreed CTC and a contractual obligation. The case was settled by management in favor of the employee. Now, in the appointment letters against 'gratuity' column, it is written 'subject to eligibility'.

I shall be happy to get comments/suggestions on this.

Cyril

Mr. Cyril,

I have been mentioning in appointment letters that gratuity shall be paid as per the provisions of The Payment of Gratuity Act. In the CTC sheet I provide to the employee, I include gratuity and in brackets, I specify "as per Payment of Gratuity Act." If the letter does not mention anything about the Act and is subject to eligibility, then you will end up paying.

Siva

Thanks,

We should be careful while incorporating items in the CTC. If eligibility to any item like provident fund, bonus, gratuity, etc., is based on provisions under the law, the same should be mentioned. Otherwise, they would become contractual obligations.

Cyril

The general components of salary are as mentioned below:

Basic Salary

Commissions/Incentives

Bonus

Dearness Allowance

Child Education Allowance (better given as reimbursement to save tax)

Child Hostel Allowance (better given as reimbursement to save tax)

City Compensatory Allowance

Conveyance Allowance

House Rent Allowance

Leave Travel Allowance (better given as reimbursement up to a maximum of 15,000/- to save tax)

Lunch Allowance

Medical reimbursement up to a maximum of 15,000/ (otherwise it will go in tax)

Newspaper Allowance (better given as reimbursement to save tax)

Special Allowance

Gift Voucher

Club Membership (save tax)

Additionally:

1. Uniform Maintenance

2. Professional Enrichment Allowance

3. Entertainment (Reimbursement) etc.

4. Vehicle Allowance

5. Phone Allowance

Net Pay: Is the total take-home every month after all deductions like PF, SA, Gratuity, PT or FBT.

Gross Pay: Is the total pay per month EXCLUDING deductions.

CTC (Cost To Company) - Includes all pay components, fixed or promised variable pays, Bonus, Cost implication of all benefits to the company rendered towards the employee.

Please find below a salary structure of XYZ company clearly indicative of components:

Basic Salary

House Rent Allowance

Conveyance Allowance

Any other Allowance or Salary components

Gross Total Salary

Less: Deductions

Professional Tax/ TDS, if applicable

Net Total Salary

Gross Salary

Insurance

Medical Reimbursements

Transportation

Club Membership, Health Spa Discount Coupons & Vouchers

Cost To Company (CTC)

Please let me know if the same was useful and kindly rate the information.

Regards,

Swapneel

When gratuity is included as a part of CTC, it should be paid along with the final settlement if an employee leaves the organization before completing 5 years of service, which makes him/her eligible to receive gratuity as per the Gratuity Act.

If it is not included in CTC, the liability for paying gratuity is as per the Act, i.e., completion of 5 years.

It appears that our learned friends are not looking at the statutory part of gratuity. Gratuity is a conditional payment. The employee is entitled to gratuity on completion of the legally stipulated period of 5 years. In other words, the employee will not receive gratuity if they work less than the stipulated period in the gratuity act. Then how can gratuity be a part of CTC? I feel it should not be added in the CTC.

The same logic may be applied for a bonus whose basic is below Rs 10,000 per month while calculating CTC.

Your reactions, please.

L N Murty Corporate Head - HR GTN Industries Limited Hyderabad

Dear Mr. Murthy,

Greetings!

I don't agree with your views on Gratuity because if an employee completes 5 years, it becomes a liability for the company to pay him/her Gratuity. Therefore, it directly becomes a part of the Cost to the company. The company is responsible for paying the Gratuity; nobody else will. Thus, you may count it as a part of CTC. Cost to the company means every penny spent on the employee.

Your views, please!

Gambhir

Hi,

I refer to the observations of Mr. Murthy. If gratuity, bonus, provident fund, etc., which come under statutory provisions, are not included in CTC, the management will have to pay these as per statute. However, if management includes these in CTC, it only means that the management is agreeing to give the benefits as mentioned in the appointment letter. The employee, as such, cannot be denied the benefit simply because he has not completed the qualifying service. To guard against this, it is advisable to mention against such payment "subject to eligibility under the relevant Act."

In one case, the employer had included a 20% bonus in CTC. When the employee was paid at a lower percentage on the grounds of losses, he challenged it, saying that the company having agreed to pay 20% cannot go back on the commitment.

The legal opinion was that the terms are contractual in nature and must be implemented.

It is, therefore, safe for the management to say "subject to eligibility."

Cyril

Dear Gambhir,

The salary structure will be as follows:

Basic Salary: 30% - 50% of the CTC (Cost to Company)
HRA: 50% of Basic
Dearness Allowance: Most companies will not have this parameter. DA will be allotted by the government and is fully taxable.
Transport Allowance: Up to Rs. 8000/month is not taxable.
Telephone Charges: Fully taxable
Deputation Allowance: Completely taxable
Annual Medical Reimbursement: Rs. 15,000/-
Gross Salary + Statutory deductions like PF = CTC
Gross - Deductions = Take Home

Hope this information helps you.

Best Regards,
Isaac Patturaja

I agree with your view. The liability for gratuity will come only on completion of the required period of service, i.e., 5 years under the act, and the employee will not get any gratuity if he is leaving before five years. Thus, the employee will be losing that much money set aside for gratuity in his CTC. Will the managements pay the total money set aside against gratuity at the time of leaving? I don't think any management will pay the accrued amount of gratuity to the employee in case he leaves before completion of five years.

Thanks,
L N Murty

Dear ISAAC,

You have given a nice explanation of CTC. Really good one.

Now, if you do have any idea regarding the laws of bifurcation of the salary components, please let me know.

Gambhir

Mr. Murthy, I agree with you. But, why should any company think that a new joiner will leave the organization within a span of 5 years? Why don't we forecast all liabilities of an employee that are supposed to be shouldered by the company? It's an era of high attrition, but management should not consider the "To be or not to be" state. Well, it purely depends on the policy of the company.

Gambhir

It is closer to 5%.

I would also like to highlight the recommendation of the latest Commission on Labour, which has recommended gratuity to be deposited like PF every year. The employee will receive the benefits upon attaining superannuation. I do not remember the exact recommendation, but the above was the crux of it. Even PF had this 5-year clause until the 1980s.

Another aspect about gratuity is that it is payable if an employee dies even if they have not completed 5 years. Whether we should include it as part of CTC is left to individual companies.

Siva

Mr. Isaac,

Transport allowance is Rs 800.00 (eight hundred only) per month. No tax will be deducted as per IT.

Please note that you have written 8000/- (eight thousand). Is it a typographical mistake? If so, please ignore.

Thanks,
L. N. Murty

Dear Mr. L. N. Murthy,

Greetings from Isaac Patturaja. I would like to inquire whether you have previously worked at Orient Cements, Devapur plant. Could you please provide clarification on this matter?

Best Regards,
Isaac Patturaja

Dear All,

I have mentioned Rs. 8000 for travel allowance in the CTC structure. As pointed out by Mr. Murty, it should be Rs. 800 only. Please make the necessary changes. Apologies for the error.

Thank you very much, Mr. L. N. Murty, for correcting me.

Isaac Patturaja

These are some heads counted for CTC in PSUs:

Basic Pay

Variable Dearness Allowance

Company Lease/HRA

Transport Allowance

Professional Updation Allowance

Washing Allowance

Cable Connection Charges

City Comp Allow

Canteen Subsidy

Encashable Compensatory Off

Refreshment Charge Reimbursement

Earned Leave Encashment

Half Pay Leave Encashment

Provident Fund

Medical Reimbursement

Performance Pay

Leave Travel Allowance

Holiday Home Encashment

Higher Qualification Incentive

Small Family Incentive

Children Education Allowance

Telephone Reimbursement

Laptop Reimbursement

Laptop Maintenance

Furniture Reimbursement

Furniture Maintenance

Lease Maintenance

Gratuity

Dress Allowance

Professional Membership Reimbursement

Spectacles Reimbursement

Handbag Reimbursement

Productivity Allowance

Conveyance Maintenance Expenses Reimbursement

Reimbursement of Catering Expenses

Entertainment Expenses Reimbursement

Electricity Charges Reimbursement

Newspaper Reimbursement at Residence

Credit Card Fee Reimbursement

Brokerage Charges for Company Leased Accommodation

Special Pay

Personal Pay on Stagnation

Remote Locality Allowance

Cash Handling Allowance

Outfit Maintenance Allowance

Shift Duty Allowance

Non-Practicing Allowance

Secondment Allowance

Tribal Area Allowance

North-Eastern (Special Duty) Allowance

Officiating Allowance

Superannuation Benefit Fund

Driver Allowance

Any differential amount of Interest Concession (below market rate) availed in any type of Advance is also counted like:

Conveyance Advance

House Building Advance

CNG Kit Advance

Lumpsum Advance

Any tax paid by the organization to the government on the perks availed by employees is also added like:

Gifts and rewards

Tax on House perks

Hi,

I agree that gratuity, as well as all other allowances paid by the employer to the employee on the submission of bills, should be covered by the CTC.

This is a simple formula for calculating CTC. Am I right?

Manish

Over the years, no one has been able to clearly define what constitutes CTC. By its very definition (cost to company), any cost that the company incurs on the employee will come under the ambit of CTC. However, it becomes difficult to quantify items such as medical expenses, which are reimbursed based on actual expenditure, irrespective of any limit.

I have noticed that most private companies include the maximum number of items in the CTC, whereas PSUs have generally been seen to include mainly items, apart from basic pay, DA, etc., for which the payment figure remains consistent.

Dear All,

If I am not wrong, the Sodexo Coupons can be given up to 24,000 per annum without any tax liability for the employee as well as the employer. Can somebody shed some light on how these coupons are distributed among employees? Is it based on the hierarchy? For example, for senior management, we pay 24,000, for middle management 15,000, and for lower-level employees 10,000 per annum.

Regards,

RAM

Hi,

Please find the attached file for your reference. It would be helpful.

Regards,
Beula

Can PLVC (Performance Link Variable amount), which is paid in two different quarters depending on the company, also be a part of CTC?

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Hello friends,

I have recently come across the Compensation theory in my college, and I would like to add about the components of CTC. There are 6 components in it:

a) Basic Salary:
This includes:
- Basic pay
- HRA
- DA
- Three other allowances

b) Deferred income:
It includes:
- P.F
- Gratuity
- Superannuation
- Professional tax

c) Merit-linked incentives:
This is the performance-based pay, involving achieving targets, etc.

d) Yearly income:
It includes Bonus, LTA, Dividends.

e) Fringe benefits in Cash

f) Fringe benefits in kind

A-B+C+E = take-home salary.

This is what I have done; it may be too theoretical, but these are just the concepts that we are taught. I need some more additions related to the practical aspect as it is done in organizations.