Understanding Your CTC And In-Hand Salary

CTC and In-Hand salary is, by far, the most inevitable and annoying truth of the professional world. Right?
Many new professionals divide their CTC by 12 assuming that would be their salary. 

Happiness goes over the moon but falls back down when the actual amount is way lesser than the sweet assumption. 
In this article, we will discuss each component of your salary structure to understand CTC and In-hand salary.
It’s time for you to thoroughly explore your salary breakdown. That’s where all the knowledge of taxable and non-taxable amounts resides.

Let’s begin…

What is CTC or Cost To the Company?

As the name suggests, it is the amount that a company has to pay to hire an employee. 
CTC is a combination of basic salary, provident fund, various insurances and allowances, gratuity, and sometimes, bonus. CTC also includes the Tax that will be deducted from your salary based on the tax slab.
Often companies offer individual or family health insurances that you can use.  Allowances can be for food, internet, housing rent, cab services, petrol, or anything.
All these things vary from company to company and employee to employee.

What is Gross Salary?

Gross salary is what you get by adding the basic salary, HRA, and other allowances.
Again, this is not your net salary. A tax will be deducted from the gross salary to, finally, calculate your net/in-hand salary.

Let’s take a rough example of 6LPA as a CTC throughout this article. 

Gross Salary Includes the following things-

1. Basic Salary

The basic salary is around 35-45% of your total salary. It could be higher in some cases.
This is the amount that you get paid for the job you are doing with your skillset. The basic Salary is a fixed amount, which differs from employee to employee.
Note that the Basic Salary is 100% taxable. That means you cannot claim tax over basic salary.
For the sake of example, let’s assume that your basic salary is 45% of your total salary. According to 6 LPA, it would become 22500/month or 270,000/year.

2. House Rent Allowance

Companies often offer HRA to cover your rental living arrangements. 
HRA could be-

  • 10% of the basic salary.
  • 40% of the basic salary if you live in a non-metro city.
  • 50% of the basic salary if you live in a metro city. 

You can check your HRA from the salary slip to know which of the above three is applicable to you. HRA is a fully taxable amount under section 10(13A) of the income tax act unless you have proof to claim it.

You can use a rental agreement signed by your landlord as proof to claim HRA. Let’s consider your HRA is 50% of your basic salary. That would make it 11250 INR per month.

3. Medical Insurance

You will also get medical insurance in your gross salary. Most times, your parents, spouse, children, or all would be included in the insurance.
You can claim the insurance benefits by showing medical bills and reports. 

Tip- Medical emergencies can occur anytime. Always understand the whole process of claiming your medical insurance beforehand. It will speed up the process in case you need it.

Let’s say your Medical allowance is 1300 Rs/month.

4. Special Allowances

This includes food, internet, cab services, or anything that the company has to offer additionally. The amount you get for each special allowance varies from company to company.

If you don’t end up using it, this amount is also taxable. If you use the partial allowance, the remaining amount will be taxable.

To save the tax, you can show proof that you, as a matter of fact, have been using these allowances. 

Keep all the bills throughout the year to submit as proof.

For example, let’s assume your special allowance is 6000 Rs/month.

5. Gratuity 

Gratuity is sort of a loyalty bonus. Employees receive it either on retirement or after completing certain years in the company.

Say your company will offer a certain amount after you complete 5 years in the company. You will only get that amount if and only if you work in the same company for 5 years.

6. Bonus

Some companies offer various kinds of bonuses such as performance bonuses and festive bonuses. This amount is also taxable. 

7. Employee Provident Fund

The Employee Provident Fund is a long-term saving plan for your retirement. Both you and your employer contribute to your EPF account each year in agreement.

EPF contribution= Employee Contribution (10-12% of salary) + Employer Contribution (12% of salary)

You can withdraw money from EPF whenever you need it. But you may earn decent returns on it if you hold it for the long term. Let’s say you put 12% of your salary into EPF.

It would be around 4000 and will be deducted from the salary.

Earlier, EPF contributions and the interest earned used to be tax-free. Now the government has changed the rules.

According to new rules-

  • Employees have to pay tax on the interest earned on contributions above 2.5 Lakhs/year. This means interest earned on the contribution up to 2.5 lakhs will be tax-free. Please note that employers do not have to pay tax for their 12% contribution.
  • If an employee is the only one contributing to the EPF, the same rules apply but for the threshold of 5 lakhs.

Additionally, you will have to pay 10% TDS as per section 194A of the IT Act on taxable interest above the threshold. 

8. Professional Tax

Professional Tax is an amount your employer directly deducts from your salary. It will depend on the tax slab you fall under. 

The company can only deduct up to 2500/month as a professional tax. It varies from state to state in India.

For example, 

Professional Tax Deduction In Maharashtra

Salary Per MonthProfessional Tax
Salary up to 7500 (Men)No Tax
Salary Upto 10000 (Women)No Tax
Salary Between 7500 - 10000175 Rs
10000+200 Rs

Now let’s finally come to the In-hand Salary

What is In-Hand Salary?

Your In-Hand salary or the net salary is what you take home. 

In-Hand Salary = Gross salary - all the deductions

From the above examples, your gross salary becomes = 45000 + Bonus (if any) + gratuity(if any)

Deductions include income tax on salary and allowances along with professional tax. The In-hand salary after deductions and putting 12% in EPF would be around 40300 INR.

That is the final amount you get in your bank account by the end of each month. When you file for ITR, you can claim the taxable amount by showing the necessary proof. 

Note- The above salary calculations are only for the sake of an example. It may vary depending on your salary structure.

Key Takeaways

Studied your salary slip yet? 

Be it your very first job or a 5th switch, understanding your salary structure is very important. Don’t let the illusion of CTC rule you. There’s a lot more to that.

From the above breakdown, you will be able to see how your salary structure works. It will also help you negotiate your salary structure with your employer.

Taxation comes into the picture at almost every subsection of your salary. Income tax rules, even though complicated at times, can come in handy if you know how to benefit from them.

Keep track of your expenses under all the allowances. Maintain a spreadsheet to note down your finances. You can also consider various investment avenues to get more tax benefits. Knowing how to divide your salary into savings, investments, and expenses will help you in the long run.

Get in touch with our advisors to analyze your investment portfolio. Start building wealth for your retirement as early as you can.

You may like to read- 

7 Types of Tax Saving Instruments

Benefits of Investing Early