Let’s Understand Complete CTC Calculation With An Example!
CTC calculation is one tedious calculation but still is a great way to understand the total cost of the employee to the company. It includes everything from employee schemes like ESI and PF, Gratuity, various allowances and insurance, professional tax, and of course, the basic salary!
These around 10 to 15 components add and subtract to help you arrive at the final CTC value. You can use a CTC calculator or do the whole maths independently. Whatever you do, it is always good to know how things work!
What Are The Various CTC Components?
#1: Basic
Basic is that component that the employee receives solely for the services they offer to the employer.
It is what it is called- the basic salary. It is what you receive before any omissions or additions are made.
Note: Basic salary is entirely taxable and thus should not be more than 40% of the CTC. But not too low than that because other components will decrease too.
#2: Dearness Allowance (DA)
Dearness Allowance is provided to the employees to offset the rising cost of living. Since it depends on the cost of living, it varies from city to city.
#3: House Rate Allowance (HRA)
HRA is given as an allowance for the employee’s house rent.
It is entirely tax-exempt if the employee lives in a rented house and taxable if otherwise.
#4: Leave Travel Allowance (LTA)
LTA is the allowance employees receive for certain travel expenses. The best part is, it is entirely tax-exempt twice every four years!
Other allowances include conveyance, overtime, meal, uniform, city compensatory, etc.
#6: Reimbursements
Reimbursements and allowances are often confused, but they are a lot different.
Allowances do not require the employee to shell out anything from his pocket. While, reimbursements are made when the employee does certain expenditures, submits the bills and receipts, and then gets reimbursed.
#7: TDS
TDS or Tax Deducted At Source is the tax deducted on Net Salary. The employer deducts this tax and submits this part of the tax to the government.
#8: EPF
EPF is the Employee Provident fund where both the employer and employee contribute 12% of the employee’s gross salary.
The employer’s contribution is divided into EPF and Employee Pension Scheme (EPS).
The EPF Contributions are made in the following fashion:
#9: Professional Tax
PT is deducted from every professional’s basic income monthly or semi-annually. And it can be a maximum of ₹2,500.
#10: Gratuity
Gratuity is not yet considered a part of CTC. But it is a form of lumpsum loyalty benefit that employees are eligible to receive once they complete five years in an organisation.
#11: ESI
ESI is a social security scheme that ensures medical and unemployment benefits to the employee. The employee can participate in this scheme if their Basic + DA is limited to ₹21,000.
The CTC Calculation Example
Let’s first calculate Gross Salary,
Gross Salary = Basic + HRA + LTA + Special Allowance + Bonus + EPF + Professional Tax + Reimbursements
Now, CTC is,
CTC = Gross Salary + Employer’s PF Part + ESI
Let’s say, Basic = ₹5,00,000
So, the calculation is as follows,
Note: Salary structure except for PF differs from company to company.
How Can A CTC Calculator Help?
Combining all these factors to arrive at the final sum is difficult. Trying out various permutations and combinations to reach the most optimum CTC for the employee is even more difficult.
That is why HRs prefer to use one or the other CTC Calculator. An efficient CTC calculator feature in HR software auto-calculates CTC from basic or HRA!
