• Investment
  • Car
  • Bike
  • Taxi
  • Term Life
  • Health
  • Travel

Difference between Take Home, Net, Gross Salary and CTC

What is Salary?

An employee’s salary is determined by several parameters like his/her profession, skillsets and years of experience, location of profession, salary structure, tax bracket that they belong to, etc. An employee’s monthly salary comprises of several components – Cost To Company, Gross Salary and Take Home Salary. It is often confusing for us to differentiate among them.

Let’s take a close look at each of them - Cost To Company, Gross Salary and Take Home Salary.

Cost To Company (CTC)

CTC is nothing but the total package of the salary of an employee. It shows the total expenses that an employer is willing to spend for an employee during the financial year.

Components of CTC:

The below illustration will give you a clear perspective of the various components of Cost To Company:

DIRECT BENEFITSINDIRECT BENEFITSSAVINGS CONTRIBUTIONS
Basic SalaryInterest Free LoansSuper Annuation Benefit
Medical AllowanceSubsidized Meals & Food CouponsEmployer Provident Fund (EPF)
Conveyance Allowance (CA)Company Leased AccommodationGratuity
House Rent Allowance (HRA)Life & Medical Insurance premiums paid by employers
Dearness Allowance (DA)Income Tax Savings
Leave Travel Allowance (LTA)Office Space Rent
Vehicle/Fuel Allowance
Phone Allowance
Incentives or Bonuses
Special Allowance & City Compensatory Allowance

As evident from the above, Cost To Company is the summation of Direct Benefits, Indirect Benefits and Savings Contributions. Direct Benefits refers to the amount paid to an employee annually, while Indirect Benefits implies to the amount the employer pays on behalf of the employee on an annual basis. Saving Contributions are the schemes in which employee or employer or both invest for making a savings for the employee.

Let’s take a look at each of these components in detail:

  • Basic Salary: This is a constant component in your salary, and never varies. This is also referred to as the in-hand salary.
  • Allowances: Further, there are a range of allowances offered over the basic salary to enable you to meet your basic daily expenses like travel to and from work, place of stay, etc. These are:
  • House Rent Allowance (HRA): HRA is the component offered to the employees by the employer. Employees who contribute towards the expenses for their accommodation are eligible for tax benefits on the entire amount paid in a financial year.
  • Leave Travel Allowance (LTA): This allowance offers tax exemptions on annual travel expenditures within India. These expenses include travel by train, flight, etc. However, this does not include other expenses during travel like food, drinks, etc.
  • Dearness Allowance (DA): This is the adjustment for the cost of living adjustment to overcome the inflationary effects that often keep increasing every year.
  • Phone Allowance: As the name suggests, this allowance is offered on an employee’s phone bill up to a certain amount every year, as specified by the employer.
  • Vehicle/fuel allowance: Again, as evident from the name, this allowance pertains to expenditures towards the purchase of fuel for employee’s vehicle in a financial year.

Example of CTC:

Let’s say Mr. Sharma’s CTC is Rs. 4,00,026. The breakdown of his CTC is as below:

Basic Salary: Rs. 1,92,600

House Rent Allowance (HRA): Rs. 1,06,300

Conveyance Allowance (CA): Rs. 19,200

Medical Allowance: Rs. 15,000

Employee Provident Fund (EPF): Rs. 21,600

Gratuity: Rs. 18,326

Special Allowance: Rs. 27,000

Gross Salary

Gross Salary includes Gratuity, Employer Provident Fund (EPF) and Super Annuation Benefit whichever is applicable. These, referred to as Savings Contributions, are offered by an employer to their respective employees. The contributions towards these are added to the Cost to Company (CTC) for the employee. These amounts are paid before the taxes are deducted and include bonuses, holiday pay, over-time pay, and other differentials.

Employee Provident Fund (EPF): This is an employee-benefit scheme under the authority of the Ministry of Labour, India. The Employee Provident Fund Organisation (EPFO) presides over decisions related to EPF, insurance schemes, pension, etc. The employer contributes a minimum of 12% of the employee’s monthly income towards his/her EPF account.

Employees are given the benefit to withdraw the entire amount accumulated in his/her PF account during the time of his/her retirement or earliest at the age of 55 years.

Under this scheme, employees also have the advantage of withdrawing the amount during certain specific situations:

  • Sudden termination of services
  • Retirement owing to permanent disability
  • Migration due to employment opportunities abroad

Gratuity: This is a contribution made by the employer towards an employee’s salary as a sign of his/her gratitude towards the services offered by the employee. This is paid at the time of his/her retirement/superannuation, retrenchment, migration due to better employment opportunities or voluntary retirement. However, an employee has to complete at least 5 years of full-time employment with the employer for his/her gratuity to attract tax benefits under Section 10(10) of the Income Tax Act, 1961. Gratuity is a percentage of an employee’s basic salary, generally 4.81%.

Net Salary or Take Home Salary

Net Salary or Take Home Salary is the actual salary that an employee takes home after every relevant Tax Deductions at Source (TDS) have been completed.

Take Home Salary = Gross Salary – Income Tax – Employees Provident Fund – Professional Tax Income Tax is based on the Total Taxable Income of the employee and is deducted at source by employers. Basic salary of an employee has to be a minimum of 50% to 60% of his/her Gross Salary.

Frequently Asked Questions

What is Cost to Company (CTC)?

Cost to Company (CTC) is the sum total of Direct Benefits, Indirect Benefits and Savings Contributions. Direct Benefits is paid to an employee by his/her employee, while Indirect Benefits refers to the amount the employer contributes on behalf of the employee on an annual basis. Saving Contributions are the schemes in which employee or employer or both invest for making a savings for the employee. Let’s take a closer look at each of these elements:

  • Basic Salary: Also known as the in-hand salary, this is a constant component in your salary, and never changes.
  • Allowances: There are a range of allowances offered over the basic salary to enable you to meet your daily expenses such as travel to and from work, place of stay, among others. Here are the allowances usually offered by employers:
  • House Rent Allowance or HRA: HRA is the component offered to the employees by the employer. Employees who pay for their accommodation are eligible for tax benefits on the entire amount paid in a financial year.
  • Leave Travel Allowance or LTA: This allowance offers tax exemptions on annual travel expenses across locations in India. These expenses include travel by train, flight, etc. However, this does not other include expenses during travel like food, drinks, etc.
  • Dearness Allowance or DA: This is the adjustment for the cost of living adjustment to overcome the inflationary effects that often keep increasing every year.
  • Phone Allowance: This allowance, as evident from the name, is offered on an employee’s phone expenses up to a certain amount every year, as specified by the employer.
  • Vehicle/fuel Allowance: Vehicle allowance is related to expenses made by an employee towards the purchase of fuel for employee’s vehicle in a certain financial year.

Example of CTC:

Let’s say Mr. Sharma’s CTC is Rs. 4,50,000. The breakdown of his CTC is as below:

Basic Salary: Rs. 1,92,600

HRA: Rs. 1,06,300

CA: Rs. 19,200

Medical Allowance: Rs. 15,000

EPF: Rs. 21,600

Gratuity: Rs. 18,326

Special Allowance: Rs. 27,000

What is Gross Salary?

Gross Salary includes Gratuity, Employer Provident Fund (EPF) and Super Annuation Benefit. These, referred to as Savings Contributions, are offered by an employer to their respective employees. The contributions towards these are added to the Cost to Company (CTC) of the employee. These amounts are paid before the taxes are deducted and include bonuses, holiday pay, over-time pay, and other differentials.

Employee Provident Fund (EPF) - This is an employee-benefit scheme under the authority of the Ministry of Labour, India, and presided over by the Employee Provident Fund Organisation (EPFO). The employer contributes at least 12% of the employee’s income every month towards his/her EPF account.

Employees are given the flexibility to withdraw the entire amount accumulated in his/her PF account during the time of his/her retirement or earliest at the age of 55 years.

Employees also have the convenience of withdrawing the amount accumulated in their account on specific situations like:

  • Retirement because of permanent disability
  • Sudden termination of employment
  • Migration to another country due to employment opportunities

Gratuity – This is a contribution made by the employer towards an employee’s salary as a sign of his/her gratitude towards the services offered by the employee. It is generally calculated at the rate of 4.81% of the basic salary of an employee.

This is paid at the time of his/her superannuation, retirement, voluntary retirement, retrenchment or migration due to better employment opportunities. However, an employee has to complete a minimum of 5 years of full-time employment with a particular employer, so that the gratuity amount attracts tax benefits under Section 10(10) of the Income Tax Act, 1961.

What does Take Home Salary mean?

Net Salary or Take Home Salary is the actual salary that an employee takes home after all the tax deductions at source (TDS) that is applicable as per his/her salary bracket have been carried out.

Take Home Salary = Gross Salary – Income Tax – Employees Provident Fund – Professional Tax

What does in-hand salary mean?

In-hand salary refers to the actual salary that an employee takes home after every relevant tax deductions at source (TDS) have been completed.

In short, Take Home Salary = Gross Salary – Income Tax – Emloyees Provident Fund – Professional Tax

Read More About Tax

Leave a rating!
5.0 (3 votes)