Salary Breakup: The structure in which the CTC (cost-to-company) is divided into various 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.
CTC, Salary breakup, and its components.
Describe CTC ( Cost to Company )
The compensation package a company gives a candidate as part of the hiring process is known as the CTC or cost-to-company. However, it is crucial to understand that CTC is never the same as the take-home pay received at the end of the month.
The total amount a firm spends on a worker, whether directly or indirectly, is known as the CTC. It consists of various elements, including a basic salary, a provident fund, and other benefits. Some businesses determine it by adding the employer’s PF (Provident Fund) and gratuity contributions to the gross salary.
Describe Salary Breakup
The basic salary, housing rent allowance, special allowance, LTA, automobile allowance, provident fund, and other components make up a salary breakup structure.
The employer has already established this salary structure, and the gross and in-hand salaries are computed.
What Factors Determine Salary Structure?
Every employee’s salary structure is unique and is determined depending on several factors, including:
- The years of experience and educational background
- Their line of job and the importance of the work being done
- the location of the employment and the city’s cost of living
- the employee’s skill sets and the demand for those skill sets
- Talent availability and order in the relevant field
Salary Breakup Structure Components
1. Basic Salary
The fixed portion of the salary, exclusive of any benefits or privileges, is known as the basic salary. Depending on the position’s location, sector, and title, it may change. It makes up between 40 and 60 per cent of the CTC and is wholly taxed. Therefore, if the basic income is kept too low, it may not comply with minimum wage standards, and if it is too high, it may result in additional tax and PF costs.
2. Allowances
Allowances are the costs incurred by the employer so that you can provide the necessary services. These extra payments are made on top of your base salary and vary depending on where you work, who you report to, and what you do. Specific corporate policies determine the allowance’s size. The most popular types of accommodations are listed below.
- House Rent Allowance
- Leave Travel Allowance
- Conveyance Allowances
- Special Allowances
3. Statutory Bonus
The company gives a statutory bonus to recognise a worker’s outstanding performance. According to the Payment of Bonus Act of 1965, it is paid as an incentive to the employees in addition to the base income. The bonus amount is expressed as a percentage of the base salary, depending on the company’s policies.
Also read: What makes you unique
4. Employee Provident Fund (EPF or PF)
An employee retirement benefit offered by the employer is a provident fund. Every month, a specific portion of the employee’s basic salary is set aside from their CTC, and the company also contributes a monthly amount to this fund.
After one month without employment, an employee is eligible to withdraw this sum. This component of the company’s retirement benefit programme is typically 12% of the basic salary.
5. Gratuity
It is the lump sum payment made to an employee after working for the company for five years. As the name implies, it is the sum given as a token of appreciation to the employee for their commitment and toil throughout their employment. According to the Payment of Gratuity Act of 1972, the gratuity amount is computed at 4.81% of the basic salary.
6. Insurance
Several businesses offer group or individual life insurance coverage to encourage their employees’ health and well-being. The premium is paid monthly with a modest amount deducted from the employee’s CTC.
7. Taxes and Liabilities
The salary’s residual amount is then adjusted to account for income tax and professional tax after all allowances, PF, gratuity, and bonus have been subtracted from it. The tax obligation on the salary is determined based on the applicable slab rates. Both the old and new tax systems are available to employees.
Your salary is directly withheld for the computed tax before being credited to your account. TDS refers to the sum that the employer withholds (Tax Deducted at Source).
8. Gross Salary
It is the gross salary before any deductions are taken into consideration. The basic pay, HRA, bonus, and allowances can all be added to the gross salary.
9. In-hand or Take-Home Salary
After all the above deductions, the in-hand or take-home salary is the remaining sum. Employees are paid a wage at the end of each month. In other words, the sum is deposited each month into the employees’ bank accounts.
Here is the formula to calculate in-hand salary –
Net Salary = Basic Salary + Allowances – (Provident fund + Gratuity + TDS + Professional Tax)
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 payment to PF and gratuity are added to the gross salary to calculate CTC.
Salary Breakup Calculation Example
Consider a CTC of Rs. 3,60,000 per year. For this, the salary breakup structure will resemble:
| Salary Components | Calculation | Amount | Deductions | Amount |
| BASIC | 50% OF CTC | 15000 | PF EMPLOYEE CONTRIBUTION | 1800 |
| HRA | 50% OF HRA | 7500 | PF EMPLOYER CONTRIBUTION | 1800 |
| LEAVE TRAVEL ALLOWANCE | FIXED AMOUNT | 3000 | ||
| SPECIAL ALLOWANCE | BALANCE FIGURE | 2700 | ||
| PF EMPLOYER CONTRIBUTION | [GROSS-HRA] * 12 % LIMIT TO 1800 |
1800 | ||
| GROSS SALARY | Basic + allowances | 30000 | TOTAL DEDUCTIONS | 3600 |
Hence, Net Pay or in-hand salary = 30,000 – 3600 = Rs. 26,400
