Whether you’ve just landed your dream job, or a well-deserved promotion, the first page of the employment letter that you invariably read is the last page – which features your salary! Prima facie, the CTC (Cost To Company) may seem fantastic, but before you start picturing lavish vacations and dream purchases, there's a crucial aspect to grasp: your take-home pay. This isn't simply the figure on your employment/ offer letter; it's the amount that actually lands in your bank account, based on which you need to plan your financial spendings. This knowledge empowers you to make informed decisions, from budgeting for everyday expenses to planning for your future goals.
Navigating the labyrinthine world of salary structures can be a daunting task, particularly for those entering the workforce or considering a career change. Two key terms that often cause confusion are CTC (Cost to Company) and take-home salary. While CTC represents the total cost incurred by the employer for an employee, take-home salary is the actual amount received by the employee after deductions. Understanding the distinction between these two figures is paramount to make informed financial decisions and set realistic expectations.
Surajit Bose, an entrepreneur and former banker with ICICI says, ‘The journey from CTC to take-home salary involves a series of deductions that can significantly reduce the initial figure. Understanding these components is essential for financial planning and budgeting.’ Bose delves deeper into the CTC figure to scrutinise its various components.
Employee Benefits: A substantial portion of CTC often comprises employee benefits, which are non-salary components designed to enhance employee well-being. These benefits can include health insurance, life insurance and gratuity. While these benefits are valuable, they are not directly received in cash and should not be factored into your overall financial planning.
Variable Pay: Most companies offer variable pay components, such as performance bonuses or commission, which are not guaranteed and are dependent on individual or company performance. While variable pay can significantly boost earnings, it's important to remember that this is not a fixed component and should be factored into long-term financial planning with caution.
Other Allowances: In addition to the above, other allowances like Mediclaim, travel allowance, house rent allowance, communication allowance etc. might be included in CTC. These do not by default get credited as part of your salary but need to be claimed against vouchers/ bills. Inability to diligently claim these amounts to their fullest will impact your take-home salary.
Statutory Deductions: Government-mandated deductions, such as Employer and Employee Provident Fund (PF) and Employee State Insurance (ESI), are deducted from the salary to contribute to social security schemes. These deductions are typically a percentage of the employee's salary and are not directly controlled by the individual.
Income Tax & Professional Tax: Albeit the computation of income tax has been simplified, as a deductible component it may significantly impact your take home salary. Taxable income is calculated after considering various deductions and exemptions. The tax rate varies depending on the income bracket, making it crucial to understand the applicable tax slab and potential deductions to minimise tax liability. Professional tax is a standard deduction of ₹2,500 per annum.
By meticulously analysing each of these components, you can gain a clear understanding of the deductions that affect your take-home salary. Bose says that the take-home salary can be computed using a simple mathematical formula:
Take-home Salary = CTC - Employee Benefits - Statutory Deductions - Income Tax - Variable Pay not paid - Other Allowances not claimed
Let's consider an example of a CTC of ₹12 lakh per annum to illustrate the journey from CTC to take-home salary. Based on these assumptions, the take-home salary would be calculated as follows:
CTC: ₹12,00,000
Employee Benefits @ 10 per cent: ₹1,20,000
Variable Pay @ 30 per cent is ₹3.6L. (However, ₹72,000 can be deducted under the assumption that 20 per cent of Variable Pay is held back)
Statutory Deductions: ₹1,00,000
Professional Tax: ₹2,500
Income Tax: ₹65,000
Take-home Salary = ₹12,00,000 - ₹1,20,000 - ₹72,000 - ₹1,00,000 -₹2500 - ₹65,000 = ₹8,40,500
Hence, while a CTC of ₹12 lakh per annum appears substantial, the actual take-home salary could be closer to ₹8.41 lakh, approximately 70 per cent of the CTC after accounting for all deductions. It's essential to demystify the complexities of CTC and get financially literate to confidently negotiate your salary. Seeking professional advice from a financial advisor can provide invaluable insights and ensure that you make informed decisions about your finances. Understanding your take-home pay is more than just knowing your earnings; it's about navigating the intricacies of deductions and allowances, ensuring that you have a clear picture of your financial landscape.