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I HAVE never understood my payslip till date, says Avni Rustagi, a native of Punjab.

Avni, 25, moved to Bangalore four years back in the hope of turning her dream into reality. In that order, she took up work as a designer with an Information Technology firm. Avni pays Rs 10,000 as rent for a spacious apartment, but ask her about how she manages her other expenses and she throws her hands up in the air. Numbers scare me, she admits. I dont know a thing about finances. She says, For instance, I dont even understand my pay structure or CTC as it is called, what I get in hand or why I get that much. Wealth realised that Avnis dilemma is a common problem with most working people. The transformation from CTC to take home leaves mostly everyone confused. Lets decode and understand what happens when CTC becomes take home. What is CTC? CTC is nothing but the cost that the company incurs to employ you and keep you employed. It includes your pay and anything else that the company may incur to keep you in employment. Here is Avnis CTC or Cost to Company.

Particulars Basic Dearness Allowance Entertainment Allowance House Rent Allowance Conveyance Allowance Overtime Allowance Medical reimbursement

Rs (per annum) 480,000 48,000 12,000 96,000 12,000 12,000 15,000

Gross salary 675,000 Companys contribution 57,600 to provident fund Annual CTC Monthly CTC 732,600 61050

Avnis salary package is quite transparent. However, each company has its own method of calculating CTC. Companies may offer an attractive CTC pay structure but the take home may be substantially lower. Here are some components that are commonly used in the CTC: 1. IT companies often add training costs in the CTC. These costs are incurred by the company for training the employees. So, naturally these do not come in the form of take home. 2. Banks include interest subsidies in CTC. That is, if you are a bank employee, you are entitled to a discounted rate on loans. 3. Performance bonuses are also included in the CTC. These are variable components and you will be paid out a percentage of the bonus depending on your performance. 4. Companies may include the cost of group medical or life insurance. Some companies may add food subsidies, that is, you may be getting a subsidy on your lunch in the office canteen. 5. Some companies include gratuity in the CTC. Gratuity is a sort of bonus that is paid out when you resign or

retire from your company. The catch: You are entitled togratuity only after completing 5 years in the company.

What is the difference between CTC and take home? As you probably gauged, CTC is not the same as take home. Your take home is always lower than your CTC. Besides examples mentioned above, there are two major components that eat into the CTC. They are: 1. Tax liability The company calculates your tax and deducts it every month from your CTC. This includes income tax as well as professional tax. 2. Contribution to PF Here is the confusing part. Provident fund contribution has two sides the employers contribution and employees contribution. The employers contribution is included in the CTC as it is a cost that the company incurs to employ you. This is usually 12 per cent of the basic salary. However, this contribution is not paid out to you monthly. It is directly deposited in your PF account and paid to you when you retire or resign. There is also employees contribution to PF. This amount (usually 12 per cent of the basic salary) is deducted from your monthly salary and deposited in your PF account. Now let us calculate how Avnis CTC becomes her take home. Step 1: Calculate tax:

Taxable amount (see notes below) Basic 480,000 (1) Dearness Allowance 48,000 (2) Entertainment Allowance 12,000 (3) HRA 52,800 (4) Conveyance 2,400 (5) Overtime Allowance 12,000 (6) Medical Reimbursement Nil (7) Particulars Gross taxable salary Tax Net annual salary Net monthly salary 607,200 86,685 (8) 205,155 43,376

Read: How do taxes affect my salary? Notes on tax calculation: Lets look at it step by step. 1. Basic salary is fully taxable under Section 17 of the Income Tax Act, ie in Avnis case Rs 40,000 is fully taxable. 2. Your Dearness Allowance and overtime allowance are fully taxable. 3. The taxability of entertainment allowance depends on the company policy. In Avnis case, this is wholly taxable. However, in some companies, entertainment allowances become tax free if bills are submitted to the extent that these expenses were used towards office purposes.

4. House Rent Allowance (HRA) exemption is applicable only if you are living in a rented house and not in your own house. HRA calculation in Avnis case is as follows: The minimum of the three amounts will be exempt from tax: a. Actual HRA allowance in the salary package, that is Rs 96,000 OR b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 10% of 528,000) OR c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in Avnis case it would be Rs 211,200 (40% of 528,000) The least amount of the three would be Rs 43,200, which is exempt. That means the actual taxable amount would be Rs 96,000 (less) Rs 43,200 = Rs 52,800 5. Conveyance allowance of Rs 9,600 per annum is exempted from tax. So, in Avnis case Rs 2,400 will be subjected to tax. Again, this is according to her company policy. In some companies, if the balance is used for official purposes, the amount becomes tax free. 6. Overtime allowance is fully taxable. 7. Medical reimbursements, if substantiated with bills, are exempt to a limit of Rs 15,000 annually. So, Avni can produce medical bills for a maximum of Rs 15,000 to her employer. If you are allotted a annual medical reimbursement of Rs 20,000, Rs 15,000 would be tax exempt if you submit bills, which means youd have to pay tax on the remaining amount of Rs 5,000. Some other allowances and reimbursements which may be part of your package are food coupons (sodexho, ticket restaurant), phone reimbursements, books and periodical reimbursements etc. The taxation of this would depend on your company policy. 8. Avni falls in the highest tax bracket. This tax amount includes education cess too. Of course, this calculation is done assuming that Avni does not make any tax saving investments. If she invests the maximum permissible limit of Rs 1 lakh, her tax comes down to Rs 55,785.

Step 2: Deduct provident fund and professional tax Out of the CTC, employers contribution to PF will not be included in the take home, as discussed earlier. Employees contribution, that is Avnis contribution would have to be deducted. Avnis monthly take home would be: Net monthly salary (post income tax) Rs 43376 less Avnis contribution to provident fund Rs 4,800 less Professional tax Rs 200 Monthly take home Rs 38,376 So while Avnis monthly CTC was Rs 61,050, her take home is just Rs 38,376 How can Avni increase her take home? Avni can plan her taxes and increase her take home. If Avni invests Rs 1 lakh (the limit under section 80 C) in tax saving instruments like PPF, ELSS etc, her annual tax comes down to Rs 55,785.

Gross taxable salary Tax Net annual salary Net monthly salary

607,200 55,785 551,415 45,951

(Less) Pf contribution 4,800 (Less) Professional tax 200 Monthly take home 40,951

It is also important that while she changes jobs, she should take some time tounderstand the package offered to her to ensure that the CTC is friendly and ensures maximum take home. Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, the web site or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information)