CTC Full Form

If you’re sitting in the college placements or for general job interviews, CTC is the word that often comes up in the conversation with the human resource manager. CTC is the abbreviation for cost-to-company. Several companies mention the CTC amount in their job description instead of mentioning the in-hand salary. The cost-to-company is the aggregate total of the expenditure that the company incurs on an employee to acquire him/her.

The cost-to-company may or may not be the same as the gross salary and in comparison, the CTC might not fulfil the expectations of the expected in-hand salary.

Components of CTC

The cost-to-company includes the basic salary plus the extra benefits for the employees, from which the taxes and the provident fund is deducted.

Following is the heads that are added to the basic salary for CTC calculations:

1. Dearness Allowance: Often the increase in the basic salary does not provide a measure to protect the employees against the inflationary economy. Dearness Allowance is a measure taken by the government to extend the protectionary umbrella to the employees. The dearness allowance or often abbreviated as ‘DA’ is paid by the government to the employees as protectionary measures to fight inflation. 

2. House Rent Allowance: Often abbreviated as HRA, the house rent allowance makes up the most integral component of the salary structure in many private as well as public sector companies/organisations. This salary component is paid by the employers to aid the employees in finding an accommodation to rent in the city the employee is currently employed in. 

3. Conveyance Allowance: The conveyance allowance is given by the employers for any type of travelling expenditures undertaken by the employee for business purposes.

4. Medical Allowances: Many companies pay the medical allowances to their employees as part of the salaried component. This allowance is paid to meet the medical needs of the employees and is paid as the fixed component every month regardless of whether the employee shows the receipts or not. 

5. Incentives or Bonuses: As an effort to appreciate the efforts of an employee, the employer pays an incentive or bonus in addition to the basic salary, in order to motivate the employee to work with more dedication.

6. Telephone/Mobile Phone Allowance: The employer pays a fixed amount every month for the telephone bills of the employee. The phone associated with the payment is usually the business mobile phone. 

The following heads are deducted from the total salary to arrive at the CTC:

1. Provident Fund: The Provident Fund or most commonly abbreviated as PF is the government lead savings scheme for retirement. Every employee contributes a specific percentage of the basic salary to the PF which is to be received after retirement along with the interest paid by the government.

2. Professional Tax: The professional tax is the tax paid on the livelihood earned from any medium altogether. It is generally levied by the state government. 

3. Tax Deducted at Source: Often abbreviated as TDS, the tax deducted at source refers to the tax collected from the source of the income. The person collecting the tax is required to file the tax under the name of the central government after the immediate deduction.

Calculation of CTC

After knowing the components of the CTC, the calculation should not be a difficult task.

For the calculation of CTC, the employers use the following formula:

CTC=Basic Salary+Benefits+Deductions

Difference between Cost-to-Company and the In-hand Salary

• The difference between the Cost-To-Company and the basic or in-hand salary is quite noticeable and the freshers entering the job market may feel betrayed by the initial offer is they are not well-versed with the difference between the CTC and the basic or in-hand salary
• As mentioned, the cost-to-company is the collective cost incurred to the company for hiring the new employees. It generally includes the allowances such as dearness allowances, house rent allowance and several other miscellaneous allowances which are added to the basic salary. After the deductions of the provident funds and several other taxes, this CTC becomes the Gross Salary. Generally, the CTC amounts are viewed by the company as the variable amount which won’t be spent if the company decides not to hire a new employee
• The employer arrives at the net salary or the in-hand salary after deducting the income tax. The major difference between the amounts that are there between the CTC and the in-hand salary occurs due to the deductions that are being carried out after the benefits provided in addition to the basic salary
• Proper tax planning strategies can help in increasing the in-hand salaries

Benefits of CTC

The concept of offering a CTC is very much popular in the countries South Africa and India. It is seen that in the past, during an interview or salary negotiation the employers were unable to arrange or work out a discussion only on the cash payments that were being made to the employees. However, the benefits provided to the employees form a substantial proportion of the salary slip and hence, involving the variable payments into negotiations are proving to be much more effective to the companies when they consider the overall cost to the firm. 

For the employees, the CTC structure can prove to be more efficient if they have a clear vision of their immediate needs and hence, can negotiate their pay structure.

Conclusion

One term that becomes a hot topic of every conversation with the company’s HR is the Cost-To-Company or CTC. The CTC involves all the variable payments that the companies make along with the basic salary to the employees and is considered the total cost incurred by the company to hire a new employee. The article explores the allowances that are available to the employees and the benefits of moving to a CTC structure.