Wednesday, May 4, 2016

CTC Break-up - What HR and Recruitment Folks Don't Want You to Fully Understand

In case you are not a corporate animal and don't know what CTC is, here is some much needed information.

CTC stands for "Cost To Company" and is your all-inclusive cost to the company.

You need to carefully note that everything the company spends on you, be it PF, NPS, Gratuity, Insurance, Incentive, Retention Bonus, Basic Salary, Perquisites is eventually paid from your CTC.

It even includes the perquisite amount for the "supposedly" free lunch in many organizations. So as you can see there is indeed really nothing called free lunch!

Bonus for meeting target performance is also a part of CTC. However, you may get more or less or even none depending upon many factors. So in some sense it can be seen as being outside the CTC.

Following sections provide a typical CTC salary break-up and explain the various components in greater detail.

Basic Salary

This as the name suggests is the most basic part of CTC and is also the most important one since it drives many of the other salary components.

Basic Salary is fully taxable.

Benefits Pay

This includes long-term retirement-oriented benefits. This is directly deducted from the CTC and never comes your way!

These either carry no tax liability for you (Insurance) or not taxed at all (PF) or taxed at the time of actual payment (Gratuity)

Employer's Contribution to PF (Provident Fund)
Minimum Rs. 1800/- per month (12% of Rs. 15000/- which is the wage ceiling set by EPFO) to a maximum of 12% of the Basic Salary

This also goes from your CTC, so there is really nothing free about the insurance cover

4.81% of Basic Salary

Choice / Flexible Pay

This includes several components some of which are driven by the Basic Salary.

This component of the CTC provides options to save tax albeit within certain limitations.

House Rent Allowance (HRA)
40% to 50% of the Basic Salary. Tax exemption on HRA is the minimum of the following three:
  • Actual house rent allowance received from employer
  • Actual house rent paid minus 10% of basic salary
  • 50% of basic salary in case of metro, 40% in case of non-metro
Meal Coupon  
Tax-free till Rs. 1100/- per month (Rs. 51/- per day for 20 days)

Conveyance Allowance
Tax-free till Rs. 1600/- per month

Medical Allowance
Tax-free till Rs. 1250/- per month

Leave Travel Allowance (LTA)
6% of Basic Salary

National Pension Scheme (NPS) Contribution
Tax-free till 10% of the Basic Salary

PF (Employee Contribution)
Minimum Rs. 1800/- per month (12% of Rs. 15000/-) to a maximum of 12% of the Basic Salary

PF Adjustment (Employer Contribution)
Adjustment in case Employer's Contribution to PF in the CTC is at Minimum and not 12% (always ask the prospective employer to provide CTC with Employer's Contribution to PF set at 12%)

Special/Other Allowance 
The final place to dump the "adjustment" amount to get to the magic figure of CTC


This includes other components that are related to miscellaneous aspects such as performance, joining and retention.

These are fully taxable just like the Basic Salary.

Incentive or Variable Pay
The secret weapon of the company's management to engineer profitability (in case it is poor or even if there is none) by short-changing the employees

Retention Bonus
The dangling carrot to force the money-minded and good for nothing employees to firmly stay put

Joining Bonus (One Time)
The dangling carrot to entice an offered candidate to join

Note: Some of the above CTC components are subject to government and statutory guidelines and may be treated differently in the future.

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