There are more than a million professionals in our country, all of them working across different cities, sectors, segments and job positions. Salaries are determined as per the requirements, educational qualifications and the skillset of a particular candidate. Even after years of employment, many employees do not fully grasp the several components of their daily, weekly or monthly salary — CTC salary, net salary, gross salary and take-home salary. This unawareness of the intricate details of their salaries, thus, can often leave them confused or frustrated.
To address these uncertainties, let us start with the most basic question — what does salary mean?
You receive a regular daily, weekly or monthly payment called salary, which is based upon industry, your profession, nature of work, location, qualifications, skills, number of years in experience, salary structure and tax racket among other components. The payment (salary) can be broken up into different sub-components such as Cost to Company (CTC), take-home salary, gross salary and net salary. By the end of this article, we shall know the difference between CTC and gross salary. If the employees receive payment at fixed intermissions, it is denoted as an annual sum.
Cost to Company (CTC)
Cost to Company (CTC) refers to the employee’s entire salary package, the overall amount the employer will spend on the employee for the financial year. It shall include direct benefits (amount paid directly to the employee), indirect benefits (annual amount paid by the employer for the employee such as infrastructure costs) and saving contributions (schemes invested in by the employer/employee//both for savings).
CTC can be divided into different segments as follows, which can help the employee decide the difference between CTC and gross salary:
- Basic Salary: Sometimes called the in-hand salary, this salary component remains constant.
- Allowance: Allowances are added to one’s basic salary that covers daily expenditure such as leave, stays, travel and more.
- Dearness Allowance: Abbreviated as DA, this covers the cost of living to adjust with the increasing inflations each year.
- Fuel Allowance: This component covers vehicle expenditure, such as the cost of fuel for the employee’s vehicle for the financial year.
- Phone Allowance: This component covers the employees’ phone bills up to a particular amount each year.
- House Rent Allowance: Employees who contribute to accommodation costs can claim tax benefits on the total annual rent.
- Leave Travel Allowance: Employees are exempted from tax on the annual cost of travel in India, such as flight and train, but it does not extend to dining.
In simple terms, CTC = Earnings (Basic Salary, House Rent Allowance, Medical Allowance, Dearness Allowance, Conveyance Allowance, Special Allowance) + Deductions
Career can be defined as different things for different people. For some, it is their life’s hard work; for some, it is their source of income; for others, it could even be a hobby. In any case, we must understand the salary components, which will help us make well-informed financial decisions.
One difference between CTC and gross salary to note is that CTC incorporates salary, contributions, tax benefits and reimbursements while gross salary incorporates basic pay, House Rent Allowance, Dearness Allowance and City Compensatory Allowance among others.
Gross salary is defined by the total salary amount that is offered to the employee before deductions. Also known as Savings Contributions, they are offered by the employer to the employee. Supplemented to the CTC, it includes holiday pay, bonus and overtime pay. In more technical terms, it is the employee provident fund (EPF), Superannuation Benefits and gratuity subtracted from the CTC.
The following components of CTC are covered in the gross salary:
- Basic salary
- Conveyance Allowance
- House Rent Allowance
- Educational Allowance
- Leave Travel Allowance
Gross salary also includes:
- Remuneration fee
- Performance-related monetary awards
- Salary arrears
- Accommodation rent
- Overtime payment
- Travel, leave and medical allowance
However, the following aspects are not part of the Gross Salary:
- Office refreshments
- Reimbursement for travel, food and other expenses on business trips
Major definitions to note about the Gross Salary are:
Gratuity refers to the employer’s contribution to the employee’s salary symbolising gratitude towards their services. Gratuity was originally paid when the employee reaches migration, retrenchment or retirement due to superior job opportunities/voluntary retirement. To avail this benefit, the employee must complete five years of full-time employment to claim tax benefits of the Income Tax Act, 1961.
- Employee Provident Fund (EPF)
EPF is defined as an employee-benefit programme under the Ministry of Labour, India. An Employee Provident Fund Organisation (EPFO) plays a role in the decisions about insurance schemes, EPF and pensions. The employer devotes 12% of the employee’s monthly salary in the EPF account. The employee can withdraw the amount in their PF account in case of migration, retirement, early retirement or sudden resignation/termination.
Net or In-hand Salary
The take-home or net salary refers to the definite salary taken by the employee after TDS deductions are performed. The difference between gross and net salary refers to the salary devoid from the employee provident fund, provident fund, gratuity, professional taxes and income taxes along with other deductions from the gross salary. The net salary could be the same as the gross salary in the case of negligible income tax or if the employee earns less than the government tax slab.
In simple terms, Net Salary = Gross Salary (excluding deductions such as a pension, income taxes and professional taxes) – Public Provident Fund, Income Tax and Professional Taxes
Difference between gross salary and net salary
- Gross salary comprises income tax, retirals and net salary; while, net salary is the amount taken home.
- Gross salary can be obtained from CTC after deducting retirals and EPF, while net salary can be obtained from the gross salary after income tax and other deductions.
Deductions from the gross salary to make the net salary are:
- Federal income taxes
- Social security taxes
- State and local income taxes
- Health insurance
- Pension after retirement
- Flexible spending
- Medicare insurance
- Company loan or advancement repayment
- Charitable donation
Therefore, in-depth knowledge of net or in-hand salary, gross salary and CTC is essential to make good financial decisions, such as tax-saving schemes, planning travels and so on.