CTC vs In-Hand Salary – How to Calculate In-Hand Salary from CTC?

Are you aware of the meaning and difference between these terms? Do they seem familiar to you? Or are you among those folks who think these terms are the same and interchangeable?

You are highly misinformed if you are amongst those who think these two terms are the same. CTC and in-hand salary are, in fact, very different. However, it is to be kept in mind that in-hand salary is a part of CTC.

Often the employees do not deduce the difference between the terms and fail to understand what they will receive in the end, which is pertinent for them.

Hence, let’s decode these two in detail below.

What is CTC?

The full form of CTC is “Cost To Company”. This is a complete package in comparison to the in-hand salary. The CTC contains many components, including multiple allowances, incentives, and savings. It is what an employer offers to an employee. All the above details are included in the basic salary.

Hence, in other words, CTC is the amount that an employer spends on hiring an employee.

Now there is a formula to calculate the CTC for an employee. It is;-

“CTC = Direct Benefits + Indirect Benefits+Savings Contributions”

We will try to understand the above-written formulae with an example. But to do that, we need to first understand all the components of the formulae in detail.

What Is Included In CTC?

As you can see, there are three things taken into consideration for calculating the cost to the company (CTC) and, gross salary, direct benefits, and lastly indirect benefits. So we need to try now to understand them individually to know how it is calculated.

Direct Benefits

This term means an employer’s monetary payment to the employee that can be identified as a reward. This is in compensation for the period they have worked for or the results they have provided. It also includes annual incentives of both short and long terms in nature. This amount, however, is taxable.

An employee’s direct benefits include basic salary, dearness allowance, House rent allowance, medical allowance, vehicle allowance, leave travel allowance, bonus, incentives, telephone allowance, etc. These benefits are part of the employee’s net or take-home salary.

Indirect Benefits

This benefit is the one the employee does not have to pay for. Instead, the company pays them on behalf of the employee. However, these expenses are included in the employee’s CTC. Indirect compensation is all the return/benefits an employer offers in addition to their base salary but not observed directly. They are, in general, the expenditure an employer/company does for an employee in their stead.

The components of indirect benefits are food coupons,  income tax savings, interest-free loans, office space rent, life insurance, medical premiums, etc.

Savings  Contributions

An employee’s savings contributions/schemes are a contribution or investment of money from the employee commonly to receive after retirement. The plan for these contributions is generally provided and managed by the employer. In layman’s language, these are retirement savings. The most common form of investment under this is employee provident funds and gratuity, including superannuation.

Here’s a quick introduction to all the benefits mentioned above:

• Basic Salary – The amount paid to the employee before other incentives and expenses are added or deducted. It includes any of the mentioned extras.
• DA is “dearness allowance”. This allowance is paid to employees of the government & private sector and pensioners to limit the effects of inflation on them.
• HRA – House rent allowance is provided by the employer for the amount payable to the employee when they rent their residence.
• LTA – Leave travel allowance the company pays when an employee travels for work/purposes. This includes travel expenses but excludes food and accommodation expenses.
• Vehicle Allowances – This allowance is the one an employer is to reimburse for fuel or vehicle charges to the employee when these are used for company purposes.
• Telephone Allowances – This is the reimbursement for the internet and telephone bill of the employee, usually with a predetermined limit.
• EPF – Employee provident fund is a part of a savings scheme for retirement. Towards the end of the month, both employer and employee contribute 12% of the employee’s basic salary. The contribution from the employee is calculative within their CTC.
• Gratuity is a payable amount from the employer for the services the employee provides. However, this amount is provided after more than 3 or 5 yrs of service.
• Superannuation – This is the fund an employee receives during their retirement. Generally, it includes provident fund, gratuity, national pension, etc.

Calculating CTC

Now that we have understood the aspects of the formulas for calculating the CTC, let us put it with an example to have a clearer understanding.

For instance, the CTC of an employee working in a company is 238000 INR.

Components	Amount (INR)
Basic Salary	100000
HRA	50000
Conveyance Allowance	15000
Medical Allowance	18000
EPF	25000
Gratuity	10000
Special Allowances	20000
Cost To Company (CTC)	238000

What Is In-Hand Salary?

In a straightforward manner of speaking, it is the salary that an employee takes home. It is also called net salary. In hand, salary is the amount an employee is paid after deducting all the taxes and other required deductions.

“Net Salary = Gross Salary – Deductions.”

This indicates the components of the in-hand salary include gross salary. And the significant difference between net and gross salary is the inclusion of all the deductions in gross salary. Net salary or income is the amount received after excluding TDS, professional tax, and other company policy deductions.

Gross Salary

Gross salary is the total amount of pay an employer is liable to pay an employee for their work based on a fixed period. For example, it could be found on the hour and referred to as an employee’s wage. But on a month-based period, that would be referred to as the employee’s salary.

The amount of pay is agreed upon beforehand by both the employee and the employer. Furthermore, in addition to the amount of the fixed income, any other payment received by employees, such as reimbursements or allowances, is also included. Additional payments, such as for overtime (including some limitations), are also added. Bonuses may or may not be added to the amount. That can be optional and sometimes paid separately.

For a salaried person, the gross salary is calculated by dividing the employee’s annual salary and dividing it by the number of pay periods in a year. Let us understand this with the help of an example:

If the employee’s annual salary is 120000 INR and the employee is paid once every month, then there are 12 pay periods in a year. Hence, going by the formulae, the employee’s gross pay will be 10000 INR.

“Gross Salary = Basic Pay + HRA + Other allowances/benefits”

Deducting In-Hand Salary From Gross Salary

We’ll understand this with the use of an example.

For example, an employee works in a firm where the employee’s gross salary is 45000 INR, and their net salary/in-hand salary is 37000 INR.

Components	Amount (INR)
Basic Salary	20000
HRA	15000
LTA	10000
Gross Salary	45000
Deductions
Provident Fund	2000
Income Tax	1000
Loan Deduction	5000
Total Deductions	8000
Net	37000

Differentiating CTC From In Hand Salary

Now, it might be pretty clear how to differentiate between the cost to the company and the in-hand salary.

The bottom line is in-hand salary is part of CTC as CTC is the total package. In-hand salary is the amount left after every deduction made and what the employee takes home with them. CTC is the total expense from the employer’s side over an employee every year.

Conclusion

After going through the above-detailed discussion, hopefully, you will better understand how to differentiate between them.

While CTC seems profitable enough for an employee to say yes to the offer, in-hand salary may be quite disappointing. However, understanding the expectations from reality and knowing that your overall CTC is at the disposal of various deductions might save you from trouble. Hence, understanding the difference between both before diving into anything can be lucrative.

Frequently Asked Questions