What is the difference between CTC and Net Salary

[00:00:00] Hey folks, CA Rachana Ranade here and welcome you all to another episode of Finance Simplified

[00:00:05] the podcast where we are going to talk about three terms which are very important for any person.

[00:00:11] So let's get started. Which are the three terms? First one is CTC. Second one is gross earning or

[00:00:20] the gross salary and third one is net salary sometimes referred to as your in-hand salary.

[00:00:27] But what is the meaning of these three terms? Are there any components in that? What is the tax angle

[00:00:32] to that? All this coming up in the immediate next part. So let's understand what is CTC?

[00:00:39] CTC is nothing but cost to company. It's the amount that the employer is willing to pay towards

[00:00:47] employee, but it's not necessarily the amount that the employee is going to receive in-hand.

[00:00:52] What's the example for this? Let's say I offer you a salary and assume that I offer a CTC of

[00:00:59] 18 lakh rupees. Does it necessarily mean that you are going to get 18 lakhs divided by 12?

[00:01:04] That is 1.5 lakh in-hand per month. Answer is no because your CTC can have multiple components

[00:01:11] okay which components what we are going to discuss that in the subsequent part. But I'll give you

[00:01:15] a very short example right now itself. Assume that as split your 18 lakh CTC as 12 lakh fixed

[00:01:22] and 6 lakhs variable okay. Now this 6 lakh variable I may term it as a performance bonus.

[00:01:28] Now assume that you are not able to meet your targets and out of 6 lakh the actual payout comes

[00:01:35] to only let's say 4 lakhs because assume that you are out of 100 percent you are able to

[00:01:40] achieve only 75 percent of your target or something like that okay. So in that case what will happen?

[00:01:44] Out of your 6 lakh performance bonus which was a part of your CTC the actual payout might be lesser

[00:01:50] than that. It might be let us say only 4 lakhs in that case for that specific year can I say your CTC

[00:01:57] dropped down from 18 lakhs to what? To 16 lakh only okay because you lost out on the 2 lakh of

[00:02:04] performance bonus. So that is how I can tell you that CTC is always a bigger number as compared

[00:02:12] to what you're going to get in hand in certain scenarios it might be more or less equal but it can't

[00:02:19] it just can't happen that your in hand salary will ever exceed the CTC.

[00:02:26] Let's take an example and understand what could be the possible splits what could be the different

[00:02:30] components of CTC before we proceed with the example please understand that this is just an illustration

[00:02:36] this is just an example whatever allowances I'm going to discuss in this example right now

[00:02:40] it's not necessary that your employer will give each and every of the allowance that I'm discussing

[00:02:45] in this example there could be some plus minus to this as well okay so let's understand. This is

[00:02:50] the example wherein a specific employer says that what does want to form a part of your CTC?

[00:02:55] It can be basic salary HRA that is your housing allowance, children education allowance,

[00:02:59] leaf travel allowance very commonly known as LTA medical allowance, special allowance,

[00:03:04] graduate, employer's contribution to BF all these put together a total 4,8000

[00:03:11] this entire thing will form a part of your CTC okay as mentioned could there be a company which

[00:03:18] doesn't offer any special allowance? Yes could there be a company which has some other allowance rather

[00:03:23] other than all these whatever I've discussed right now yes absolutely possible so you have to

[00:03:27] homework today go and check your offer later and see which all allowances are you getting

[00:03:32] are these same or some different allowance you're getting right now understand there is one specific

[00:03:38] point here I've taken a sub total which is your gross salary okay now what is this gross salary?

[00:03:44] 4,8200 this gross salary is going to be very close to what you're going to get in hand okay so what

[00:03:52] is the difference understand your CTC is 4,8000 something but your gross salary is 4,8000 something

[00:03:58] okay which is going to be very close to your in-hand salary not 4,8000 it's going to be 4,8200 that

[00:04:04] is going to be close to your in-hand salary now which are the two components which are missing

[00:04:08] from this gross salary figure in our example these are graduating and employer's contribution

[00:04:12] to BF now please understand in our example, the maturity of almost 8600 plus was forming a part of

[00:04:19] your CTC assume that you join the company and you leave the job in two years are you even going to

[00:04:26] get this no? Graduity will be paid out to you if and only if you stay with the company for a period

[00:04:33] of five years okay so if you don't stay with that company for five years this 8600 whatever

[00:04:41] is going to be gone forever but still will that be a part of your CTC yes okay I hope you're

[00:04:47] understanding the difference second one is employer's contribution to PF I'm sure you might be

[00:04:52] aware about this basic thing that a certain percentage is fixed say 12% okay so employer contributes

[00:04:59] 12% employee generally matches it okay so employee will also contribute 12%

[00:05:04] employers contribution will not be paid out to you every month that will go to a pool okay

[00:05:11] and whenever you leave the organization or let us say on retirement whatever is the case at that

[00:05:16] time it will be paid out to you okay but that even if forms part of your CTC will not form a part

[00:05:22] of your gross salary I hope you have understood we are trying to ship from what to what from CTC

[00:05:29] to gross salary I hope the difference is absolutely clear now let's try and decode the pay slip

[00:05:37] but before we move on to that let's again get back to the same chart we had two columns one was

[00:05:42] a PA per annum amount and one is PM which is the per month amount okay gross salary per month was

[00:05:48] around 34000 and 16 rupees and the CTC was 36500 and 38 rupees now the million dollar question

[00:05:55] to you is that out of these two figures which figure will appear on your pay slip

[00:06:02] what is your answer A or B 34000 and 16 or 36000 538 and the correct answer is 34000 and 16

[00:06:11] so if you want to check this in your pay slip there is one sub total which says your total gross

[00:06:17] earnings that is nothing but your gross salary 34000 and 16 now what is the split of this let's understand

[00:06:23] the split first one is basic salary okay so out of your 34000 rupees your basic salary is only 15000

[00:06:29] rupees I don't feel that area area this is even less than half of your gross salary doesn't make a

[00:06:34] difference as such in fact your basic salary is 100% taxable okay you don't get even one rupee

[00:06:41] deduction out of that so even if it is less you should be happy with that okay so that's a basic

[00:06:46] salary other points in your pay slip what are these other points how is it allowance children

[00:06:50] education allowance LTA medical allowance special allowance I'm taking some creative liberty here

[00:06:56] these allowances it's as good as an employer is taking full care of the employee okay how

[00:07:03] employer is giving you basic salary employer is ensuring that employer pays for the house rent

[00:07:10] of yours by giving you a house rent allowance so taking care of your accommodation taking care

[00:07:15] of your children's education allowance so taking care of kids education to some extent taking care

[00:07:20] of your leisure travels by giving you an LTA taking care of your medical allowances so taking care

[00:07:26] of your health and deductions taking care of your retirement in the nature of PF so see how good

[00:07:32] employers are okay but anyways all in all finally it's nothing but just a breakup of your

[00:07:39] total gross earnings which I'm showing you in the nature of pay slip are there any tax angles

[00:07:45] involved here answer is absolutely yes I'm not going to go into detail in tax angles why this

[00:07:49] is not a taxation lecture this is just understanding the pay slip so just to give you brief idea on this

[00:07:54] as I mentioned basic is fully taxable basic salary fully taxable house rent allowance

[00:08:00] may or may not be fully exempt depends on certain conditions okay so in simple words it may

[00:08:05] or may not be fully exempt depending on certain conditions right third one is children education

[00:08:11] allowance now if this is a very big big humor or big joke why I'll tell you my child's fee annual

[00:08:20] fee is around 50,000 rupees per year okay and when I was discussing this few of my friends this

[00:08:25] and all right Roshna it's very cheap because we are paying one lakh plus per year so I say oh my

[00:08:29] God that's that's so much and you know how much is the exemption or the deduction which is available

[00:08:35] it is hundred rupees per month okay subject to maximum of two children we have two okay

[00:08:43] so how much exemption am I going to get hundred multiplied by 12 okay multiplied by two is not standard

[00:08:50] if I have only one child I'll get only multiplied by one okay so out of the 50,000 rupees that I've

[00:08:56] paid Pura 1200 rupees I'm going to get as a deduction okay it's a joke but yes that is how much

[00:09:04] maximum is going to be allowed as a tax exemption for you okay well I'm using the word deduction and

[00:09:09] exemption interchangeably right now it's not correct we are not this is not a taxation lecture

[00:09:14] right so sort of emotions go somewhere low right moving on what is the next next one forming a

[00:09:20] part of your pay slip that is your LTA LTA is what leave and travel allowance okay so basically as I

[00:09:28] mentioned the employer says Jav Gwunkeo don't be only a Pustaki Kira don't only work have fun

[00:09:35] and come fully charged up and then work double right that is the expectation of the employer now

[00:09:42] there are certain rules and regulations in world again how much can be exempt from the LTA that you

[00:09:46] receive just to give you few examples if you do a travel outside India that will not be allowed

[00:09:52] as a deduction if you're going ahead with claiming a benefit for LTA okay who can accompany you

[00:09:58] that is also very important otherwise if you're saying I have a Pura deduction I want it'll be like

[00:10:04] Hamzaath Saate everyone is going a B C D E F G H every one will not get that entire amount will

[00:10:10] not get you will get as a deduction okay again who is covered what is the definition of a relative

[00:10:16] everything is given in the section medical allowance moving on to that that is also pretty close

[00:10:24] to basic salary as far as the tax section is concerned because whatever medical allowance you're

[00:10:27] going to get does going to be fully taxable okay special allowance differs from company to company

[00:10:31] it can be a car allowance it can be a driver allowance it can be a cook alone whatever it can be any

[00:10:35] sort of allowance internet allowance very creative it can be so I hope you understood that if I add up all

[00:10:41] these together this amount 34 2016 is going to be your total gross earnings is this what you're

[00:10:48] going to get in hand no from this amount there'll be certain deductions which deductions

[00:10:55] what is the meaning of that is going to come up in the next part of

[00:10:58] so let's understand what could be the different deductions could these be only three

[00:11:03] deductions for each and every employee no in some companies deductions could be more than this

[00:11:07] or could also be less than this these are the deductions in our example right so let's understand

[00:11:12] these deductions one by one the very first one is proficient tax generally 2500 rupees is the

[00:11:18] amount of proficient tax which has to be paid but what does the employer do employer cuts 200

[00:11:23] rupees per month from your salary and pays it but in the month of February 300 rupees will be

[00:11:29] deducted from your salary so 200 into 11 2200 and 300 in the month of February will take it to the

[00:11:34] total of 25 hundred rupees per year right second one is provident fund now what is this provident fund

[00:11:40] this is the employee's contribution to provident fund if you remember we talked about employers

[00:11:44] contribution to provident fund okay so this will be generally same so say 12% was contributed by

[00:11:50] the employer same 12% will be contributed even by the employee and this employees contribution

[00:11:55] will reflect in the deductions come out right third one is tedious this tedious is nothing but your

[00:12:00] income tax so employer will cut tax at source and will pay to the government okay now as a homework

[00:12:07] what you can do is take out all your pay slips take the total of tedious and see whether this total

[00:12:15] matches as per your firm 16 ideally the total should be same in firm 16 I hope with this you

[00:12:22] have understood all the deductions which were visible in your pay slip so in simple words to round

[00:12:27] it up again what was the scenario first we talked about the CTC from that we derived the gross

[00:12:34] earning and from gross earning we had certain deductions and we came down to the net salary or your

[00:12:39] enhanced salary thank you for joining us on this episode of finance simplified I hope you

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