Payslips are difficult to understand till the time you don’t know the salary breakup or components of salary included. It is not necessary but you must be well aware of what and how much you are getting as your payroll or from your employer.
Various terms like CTC, net, basic, gross salary has kept you confused for the longest time. Some other terms like reimbursements, PF, tax, and deductions are also there to make the salary structure all the more complex.
In this blog to make it all simpler for you and make you all aware, we have decided to decode the salary components for you:
What is CTC or Cost to Company?
CTC is the abbreviation for Cost to Company and it is the total amount spent or yearly expenditure of a company on an employee. It is basically the whole salary package of the employee from which some amount will be deducted as PF amount, medical insurance, etc.
CTC = Gross Salary + PF + Gratuity
What is a CTC breakup?
EARNINGS
Basic salary
A basic salary is that amount that is considered the basic amount for an individual. It is a fixed part of the compensation. This salary component depends on the designation of the employee and the industry type.
Allowances
Allowance is that amount that is received by the employees for meeting the requirements of the service. The allowances are being provided to the employee in addition to the basic salary. They differ from company to company. Here are some of the common allowances:
- House Rent Allowance (HRA): It is the allowance given to the employee for incurring expenses related to the rent of their accommodation.
- Leave Travel Allowance (LTA): It is the amount that is given by the company to an employee to cover domestic travel-related expenses incurred during office-related meetings or visits. It doesn’t include food, accommodation that the employee or people traveling along with him incur.
- Conveyance Allowance: This allowance is being given to the employees to commute from office to work.
- Dearness Allowance (DA): It is an allowance that is paid to the employees to handle the effects of inflation. This is majorly for government employees, pensioners, and public sector employees. Other such allowances are medical allowance, special allowance, incentives, etc.
Reimbursements
Employees are also reimbursed certain amounts like that of medical treatments, and bills related to office-related trips, newspaper bills, phone bills, etc. This amount isn’t received as a part of the salary, the employee is expected to show the expense receipts for reimbursement. There is also a maximum amount limit for each expense that the company would be liable to pay.
Medical Expenses
Medical Allowance is different from medical insurance.
Medical insurance is a form of social security benefit and is paid as a lump sum at the end of the year to employees who have been covered by a social security medical insurance scheme. Medical insurance is not a part of the basic salary/wage and is therefore not subject to the same rules and regulations.
Medical allowance is paid in lieu of medical insurance. Medical allowance is subject to the same rules and regulations as a basic wage, including the following:
- The basic wage of employees should not be lower than the minimum wage standard of the region or province
- The basic wage of employees should not be less than the local average wage for the industry concerned
- Payroll and taxation regulations should be followed
- The employer and employee should follow the terms and conditions of employment specified in the labor contract
Arrears
Arrears is the amount of unpaid wages that an employer owes to an employee, including expenses like overtime, commissions, and bonuses.
Gross salary (Gross Earnings)
Gross salary is that amount of the salary that comes after adding the basic salary and allowances without subtracting the taxes and other deductions. The bonuses, holiday pay, and overtime pay are also included in the gross salary.
Gross Salary = Basic Salary + HRA + Other Allowances
DEDUCTIONS
Employee Provident Fund (EPF)
PF is an investment done by both the employer and employee every month, the sum of this will act as the amount that he will give you. The amount that goes into PF each month as a contribution depends on the basic salary amount as 12% of basic salary is contributed from both sides.
ESI
ESI is a social insurance program in India that was started to provide medical facilities for employees and their dependents. It provides reimbursement of the cost incurred by an insured person when they avail treatment from a hospital. The benefits under ESI include the cost of treatment in case of hospitalization, surgery, and outpatient care.
The ESI Act was passed in March 1948. The law came into force on 2nd May 1948 with 100,000 medical benefit beneficiaries. As per the act, employees are exempted from payment of premium while employers have to contribute a certain percentage of monthly salary from their employees.
Statutory Deductions
The fixed percentage of earned income has to be paid in form of taxes to central and state government is known as statutory deductions. Some of the common deductions are-
- Income Tax: It is a type of tax charged by the central government on the income earned by individuals during the financial year as per the applicable income slab rates
- Professional Tax: Unlike income tax, professional tax is charged by the state government on the income earned by individuals during the financial year as the applicable income slab rates
Loans and Advances
Salary advances mean paying a portion of salary to employees in advance in case of emergencies. Generally, advances are recovered in installments and are interest-free.
Loans in salary mean amount from salary is deducted as a loan at a concessional rate unlike market rate of interest.
Net salary or Net Salary Payable
Net salary can also be called the take-home salary. This amount is the amount that an employee gets after deductions like that of TDS and other deductions like PF or medical insurance as per the company policy and your agreement at the time of joining the company.
Net Salary = Gross (Earnings- Deductions)
These were the few major CTC components. Hopefully, now you will not have difficulty understanding your salary structure.