The structure in which the CTC (cost-to-company) is broken into different components to determine the in-hand wage of an employee is known as a salary breakup structure or CTC (cost-to-company) breakup structure.
Employers and employees both need to understand how salaries are divided up. But given that so many factors go into calculating income, it might be a little complicated.
What is Salary Breakup
The basic pay, housing rent, special allowance, LTA, automobile allowance, provident fund, and other components make up a salary breakup structure.
The employer has already defined this salary breakup structure, and the gross and in-hand salaries are computed.
Components of Salary Breakup Structure
Cost-to-Company or CTC
The sum of money a business pays you, directly or indirectly, is known as the Cost-to-Company, or CTC. It consists of a basic salary, bonuses, a provident fund, and other things. Simply put, this is the whole wage package you will receive from the organisation if you are selected for the position. However, it is not exactly the same as the amount you receive each month.
CTC= Gross Salary + PF + Gratuity
Basic salary
Your base salary serves as your income and is the only fixed element of your compensation package, leaving out benefits and incentives. Your basic salary will vary depending on your position and the sector you work in, but it is often between 40 and 60 per cent of your CTC.
Allowances
An allowance is a sum of money given by your employer to cover the costs you spend to fulfil your service obligations. Usually, in addition to the base pay, they are offered. Dearness allowance (DA), housing rent allowance (HRA), leave travel allowance (LTA), and conveyance or transport allowance are the most popular types of allowances. Again, depending on each company’s policies, the quantity of these allowances may vary.
Bonus
Typically, a bonus is given in appreciation for your muscular performance. It is additional pay to the base salary. The period in which the compensation is due varies depending on the company, and the bonus amount might be fixed or variable.
Provident fund (PF)
The provident fund is an investment you and your employer make each month that will benefit you after you retire. When your basic pay is up to Rs. 15000, this sum is typically calculated at 12% of that amount and immediately deposited into your PF account. The corporation may still decide to keep its share at 12% of Rs. 15000 even if it exceeds the specified threshold amount.
Insurance
However, not all businesses offer the insurance advantage. Your life and health insurance are paid for with a little monthly deduction from your pay. Each month, the premium is taken out of your paycheck. This amount is included in the CTC but is withheld from your net salary.
Taxes
Your final pay deduction goes towards the income tax and professional tax sections. Before paying you, the employer withholds the appropriate amount of tax (based on the applicable tax slab and rate) from your wage. The tax is also known as TDS, or tax deducted at source. The professional tax is another type of deduction from your earnings in addition to income tax.
Net Salary or Take Home Salary
Finally, the money you take home with you is the net Salary. To determine this amount, combine your basic Salary and allowances, and then subtract the various taxes (income tax, EPF, professional tax) from the total. This is the sum credited to your bank account at the end of each month, giving the most accurate picture of your income.
Net Salary is defined as Basic Salary plus Allowances minus Income Tax/TDS, Employer’s Provident Fund, and Professional Tax.
Gross Salary
The Gross Salary is calculated by adding the allowances to the base pay. Before applying taxes and other deductions, this sum is determined.
Basic Salary + Other Allowances = Gross Salary
Gratuity
Employees who have worked for the company for five years are given a lump sum payment. The amount is provided as a token of appreciation to the employee for their commitment and toil during their employment, as the name suggests. The Payment of Gratuity Act of 1972 specifies that the gratuity is calculated at 4.81% of the basic pay.
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Once understood, the pay structure is simple, and negotiating it is more straightforward. Gaining the most money possible in exchange for the services you supply is the main objective of pay negotiations in a tax-efficient way.
How is Salary Breakup calculated?
Salary typically consists of three parts: Basic Salary, Allowances, and Deductions. Calculating Net Salary is done as follows:
| Particulars | Amount | |
| Basic Salary | (A) | XXXXX |
| Add: Allowances | (B) | XXXXX |
| Gross Salary | (C = A+B) | XXXXX |
| Less: Deductions | (D) | XXXX |
| Net Salary (In-hand Salary) | (E = C-D) | XXXXX |
The employer’s PF and gratuity contributions are added to the gross salary to determine CTC.
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