You might have heard the term CTC being used to refer to one’s remuneration for their employment. But what does CTC actually mean? And what are the implications of taxes on our CTC? Knowing the full picture of your CTC can help in financial planning.
In this post, we will dissect the intricacies of CTC calculations, tax implications, and retirement benefits in India.
Your CTC (Cost to Company) is the total cost incurred by an employer for hiring and retaining an employee. It is the sum of your salary, allowances, and benefits. Gross salary is the total amount of money an employee earns before any deductions are made. In-hand salary, commonly referred to as net salary, is the amount of money an employee receives after all deductions, including taxes, provident fund, and professional tax.
Basic salary is the fixed component of an employee's salary, typically forming 40-50% of the CTC. Allowances are those components of salary that depend on factors like performance, location, and grade. They can include house allowance, medical allowance, conveyance allowance, and others.
To calculate CTC, you simply add the gross salary and benefits.
CTC = Gross Salary + Benefits
Gross salary is calculated by adding the basic salary and allowances.
Gross Salary = Basic Salary + Allowances
In-hand salary is calculated by subtracting deductions from the gross salary.
In-hand Salary = Gross Salary - Deductions
Numerous deductions are made from your gross salary which reduces your in-hand salary. Some of the most common deductions include:
Income Tax: The tax payable on your income, calculated based on your income slab and tax regime.
Provident Fund (PF): Contributions made by you and your employer to your EPF account.
Professional Tax: Tax paid to the State Government for being able to work in that state.
Other Deductions: Loan repayments, advance payments, insurance premiums, and other deductions as per your employment contract.
The specific deductions that apply to you may vary based on your circumstances and the policies of the company.
How the tax laws affect your CTC is varied across its many components. Here's a breakdown of some key areas:
Employee Stock Option Plans (ESOPs): ESOPs are taxable in two stages. First, when shares are allotted, the difference between the fair market value and the exercise price is taxed as "Salary." Second, when the employee sells the shares, any profit earned is taxable under the head "Capital Gains."
Motor Car or Conveyance Facility: Taxable based on factors like ownership, usage, and cubic capacity.
Free Meal Allowance: Taxable if it exceeds specified limits, with exemptions for certain types of meals.
Use of Movable Assets: Taxable based on the asset's value and depreciation, with exemptions for certain items like computers and laptops.
Transfer of Movable Assets: Taxable based on the asset's value and depreciation, with potential deductions for any payments made by the employee.
Interest-Free Loans: Taxable as a perquisite unless the loan is for a specified disease or below Rs. 20,000. In other cases, interest calculated at SBI rates will be considered taxable income.
Medical Facility: If your employer pays for your health insurance premiums or reimburses you for medical expenses, this benefit is often exempt from income tax if it stays within the prescribed limits set by tax regulations.
Fully Taxable Allowances: Entertainment allowance for non-government employees and certain allowances for employees of foreign companies.
Partially Taxable Allowances: House Rent Allowance (HRA), Leave Travel Allowance (LTA), Transport Allowance, exceeding specified limits.
Fully Exempt Allowances: Conveyance allowance, uniform allowance, academic research allowance, helper allowance, daily allowance, and certain allowances for government employees and specific individuals.
Retirement benefits are another important component of your compensation package.
Pension payments, whether commuted or non-commuted, are taxable, with specific exemptions available for government employees and certain non-government employees.
Gratuity up to Rs. 35 lakhs is exempt from tax for those with at least five years of continuous service, while any surplus is taxable. Leave encashment received during employment is fully taxable, but exemptions may apply upon retirement. VRS payments also have tax implications, with an exemption of up to Rs. 5 lakhs.
Knowing the many components that make up your CTC can improve your know-how on saving money on taxes. For further details and personalized advice, you can always download the JJ Tax App where our user-friendly interface combined with access to our team of experts makes saving on taxes a child’s play, making sure to maximize your savings and minimize your liabilities.
