Many of us have confusion regarding Salary, Net Salary, Gross Salary, and Cost to Company. Are they the same or different? I hope this helps you clear your doubts. I shall try to cover what makes up the salary and the differences between Salary, Net Salary, Gross Salary, and 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 as an Employee
2. Working for themselves or being Self-Employed
3. Running a Business
When a person works for someone else or a company, he/she is said to hold a job and is called an Employee. The person or the company he or she works for is called the Employer.
“Money that is paid is called Salary, Income, or Wage.”
#Salary - Money received under an Employer-Employee relationship is called Salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. (In such cases, your income would be treated as income from business and profession).
Did you know that the word salary comes from the Latin 'Salarium,' based on 'Salarius,' which means pertaining to salt? The word appeared between 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" refer to the high value of salt.
The Salary Consists of the 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: This is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a 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 from employee stock options, and so on.
Deductions: Two Types of Deductions are Made from Salary
Compulsory deductions such as Provident Fund, Income Tax, Professional Tax (where applicable).
Optional deductions 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 the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when he retires or resigns. There is also the employee's contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on the provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Different Types of Salary
Gross Salary: This is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: This is what is left of your salary after deductions have been made.
Take Home Salary: This is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to the employee, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do 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.
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 that 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, and retain the employees and may also include a part of overhead cost allocation.
• Recruitment Cost
• Base salary
• Bonuses
• Administrative
• Office Space
• Technology
• Benefits
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
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 following:
• CTC
• 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 gets in 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 in 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 depend 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 they are paid when you submit your bills. These are usually tax-free.
4. Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do 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 the target, but it forms a part of your CTC, fattening it up.
6. Taxes: Taxes cause 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: 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 paycheck.
Please take a few minutes to give your feedback in order to enhance all Cite HR Members' knowledge.
Regards,
Ankita
Executive HR
“A candle loses nothing by lighting another candle.” In other words, be willing to help others and share your knowledge and insights with others who may benefit.
From India, Patna
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147How People Earn Money?
The three broad ways in which people earn money are as follows:
1. Working for someone else or as an Employee
2. Working for themselves or being Self-Employed
3. Running a Business
When a person works for someone else or a company, he/she is said to hold a job and is called an Employee. The person or the company he or she works for is called the Employer.
“Money that is paid is called Salary, Income, or Wage.”
#Salary - Money received under an Employer-Employee relationship is called Salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. (In such cases, your income would be treated as income from business and profession).
Did you know that the word salary comes from the Latin 'Salarium,' based on 'Salarius,' which means pertaining to salt? The word appeared between 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" refer to the high value of salt.
The Salary Consists of the 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: This is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a 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 from employee stock options, and so on.
Deductions: Two Types of Deductions are Made from Salary
Compulsory deductions such as Provident Fund, Income Tax, Professional Tax (where applicable).
Optional deductions 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 the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when he retires or resigns. There is also the employee's contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on the provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Different Types of Salary
Gross Salary: This is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: This is what is left of your salary after deductions have been made.
Take Home Salary: This is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company: Companies use the term “Cost to Company” to calculate the total cost to the employee, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do 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.
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 that 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, and retain the employees and may also include a part of overhead cost allocation.
• Recruitment Cost
• Base salary
• Bonuses
• Administrative
• Office Space
• Technology
• Benefits
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
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 following:
• CTC
• 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 gets in 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 in 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 depend 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 they are paid when you submit your bills. These are usually tax-free.
4. Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do 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 the target, but it forms a part of your CTC, fattening it up.
6. Taxes: Taxes cause 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: 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 paycheck.
Please take a few minutes to give your feedback in order to enhance all Cite HR Members' knowledge.
Regards,
Ankita
Executive HR
“A candle loses nothing by lighting another candle.” In other words, be willing to help others and share your knowledge and insights with others who may benefit.
From India, Patna
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Can any one tell me ? what is difference between professional tax and income tax ?
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CTC SALARY SLIP FORM.xls