A complete guide on how to calculate CTC in India

Understanding the calculation of Cost to Company (CTC) is crucial for both employers and employees. CTC provides a clear picture of the total compensation package, helping employers in effective budgeting and payroll management and employees understand their earnings better. In this article, you will learn the CTC calculation formula, how to calculate CTC, and other associated details.

Introduction to CTC

Employers and HR professionals widely use the term ‘Cost to Company’ (CTC) in the context of employment and jobs. CTC represents the total amount an employer spends on an employee in a year, encompassing all salary components, bonuses and benefits. While the basic salary is the primary component of an employee's compensation, CTC includes all additional elements to provide a comprehensive view of the financial benefits offered by the company.

What are the different components of CTC calculation?

The different components involved in CTC calculation include:

• Basic salary

It usually ranges between 40% to 50% of the CTC. A basic salary is a fixed income that an employee receives and serves as the foundation for other components. It forms a major part of an employee's take-home salary and is fully taxable.

• House Rent Allowance (HRA)

Many companies provide a House Rent Allowance (HRA) to help employees cover the cost of living in rented accommodation. The amount is calculated as a percentage of basic salary and varies based on the employee’s location.

• Dearness Allowance (DA)

Employers pay Dearness Allowance (DA) as a percentage of the basic salary to counteract inflation. It is taxable and varies by location. In the public sector, both current employees and pensioners receive DA. There are two types of DA:

Industrial Dearness Allowance (IDA): This allowance is revised quarterly for public sector employees based on the consumer price index.
Variable Dearness Allowance (VDA): This allowance is revised half-yearly for central government employees.

• Medical and conveyance allowances

Employers pay medical allowance to employees to cover medical expenses, making it part of the salary structure. It is taxable and is added to the employee’s taxable income. Employers also provide conveyance allowance to cover travel expenses to and from work. It is also taxable depending on the amount provided.

• Leave travel and other allowances

Leave Travel Allowance covers travel expenses while on leave and is eligible for tax exemption under the Income Tax Act. It typically covers domestic travel. Employers provide additional allowances, such as overtime allowance, entertainment allowance and children's education allowances, which may be fully taxable.

Learn more about allowances here.

• Employees’ Provident Fund (EPF)

The Employees’ Provident Fund (EPF) is a retirement benefits scheme where both employers and employees contribute 10 or 12% of the employees’ EPF wages. Employee contributions to the EPF are non-taxable, and partial withdrawals are allowed after a year of service.

• Variable pay

Employers offer variable pay such as incentives or bonuses as rewards for achieving specific performance goals. These are taxable and added to the gross salary. Incentives can be structured (like monetary rewards for achieving targets) or casual (like non-monetary gifts or small rewards).

• Gratuity

Employees receive gratuity as part of their salary upon leaving the job after a certain period of service. Employers deduct it annually from the CTC.

The final calculation of CTC also involves certain deductions which are as follows:

• Professional tax

Professional tax regulations can differ based on the state where the company operates. This tax, levied directly by the government, varies in rate from state to state. As per the Income Tax Act, employers have to deduct the professional tax from the CTC of their employees.

• Income tax

It is imposed on an individual’s personal earnings. The income tax amount depends on the applicable tax slab and rate. Companies handle this through a process called Tax Deducted at Source (TDS), where they deduct the tax from employees' salaries and remit it to the government.

CTC calculation formula

The formula to calculate CTC is:

CTC = Basic salary + allowances (DA + HRA + LTA + others) + employer's contribution to EPF + gratuity + medical insurance premiums + other statutory deductions + perquisites

How to calculate CTC?

Let us take an example to understand the process of how to calculate CTC in India. Suppose an employee has the following salary components:

Let’s add the additional benefits provided by the employer to these components.

To find the monthly CTC, sum all benefits and the monthly gross salary components.

Monthly CTC = ₹1,150,00

Annual CTC = Monthly CTC X 12

Annual CTC = ₹13,80,000

This calculation provides a clear view of the total cost to the company for employing an individual, ensuring transparency and aiding in financial planning.

How to calculate CTC from gross salary?

Gross salary is the sum of all earnings before any deductions are made. You can calculate CTC from gross salary using the formula below.

CTC = Gross salary + EPF + gratuity + additional benefits

For example, if an employee has a gross salary of ₹3,60,000 per year, and the company contributes ₹43,200 towards the PF account, ₹18,000 for gratuity, the total annual CTC would be:

Annual CTC = ₹3,60,000 + ₹43,200 + ₹18,000

Annual CTC = ₹4,21,200

The bottom line

Once you understand how to calculate CTC, you can accurately assess the total cost of employing an individual. This will allow you to evaluate the entire compensation package, not just the gross salary, ensuring transparency in financial planning and budgeting. With this knowledge, you can make informed decisions and manage salary structures more effectively.

Frequently asked questions