Understanding CTC

The monthly salary and wages disbursement has many vital components structured together to form a salary package. These elements are essential for both employers and employees to calculate taxes, PF, ESI, benefits, LTA, etc.

Salary Components (CTC)

Following Table gives a breakup of various components of salary components which is commonly referred to as CTC

** Various Sub Components of the CTC are described below **

Gross Salary

It comprises of following

• Basic
• HRA
• Allowances

It is currently mandated that Basic Salary is a minimum of 50% of CTC as pre the New Wage Rule 2021

Basic Salary

Basic salary is a fixed amount paid to employees by their employers in return for the work performed. It does not include bonuses, benefits or any other compensation. Basic salary is the core of employee salary, which is a a fixed part of CTC of an employee

Government at State and National level Mandates minimum basic salary to be paid to an employee based on their Skill level. It is mandatory that basic salary is not below the minimum wage prescribed. You can refer to Minimum wages to understand in detail

HRA

HRA is house rent allowance in income tax. This salary component is meant towards rent payment and is allowed as a deduction from taxable salary. Most companies include this component as a means for Tax deduction.

To ensure max possible deduction, it is generally calculated as the minimum of

• 50% of [basic salary + DA] for those living in metro cities

• 40% of [basic salary + DA] for those living in non-metros

Allowances

Over and above the basic salary, organisation can provide certain mandatory benefit, which are either fully/partially taxable or completely exempt from tax. We have indicated the most popular ones below

Medical Allowance

Paid to meet Employee's medical expenditure. There is a maximum cap for medical allowance exempt from Tax

Leave Travel Allowance (LTA)

Employee's travel expense when he or she is out of work. It is eligible for 100% tax exemption up to 1600 per month

Conveyance Allowance

Employees are provided with the conveyance allowance by their employers to meet their travel expenses from home to the workplace and vice-versa.

Children education allowances

A certain amount is given to the employees to educate their children in India. Any amount spent above INR 100pm per child for a max of two children is taxable.

Dearness Allowance (DA)

Aimed at the mitigation impact of inflation. This allowance pays a certain percentage of basic salary. This is usually paid the government to its employees, the public sector employees and pensioners.

Flexible Benefits

Flexible benefits are special allowances given to employees, saving tax for employees. Some examples of Flexible benefits are:

• Phone Allowance
• Internet Allowance
• Fuel Allowance and Driver Salary
• Food Allowance (Max 2600 per month)
• Professional Development (Yearly Benefit)
• Gift Coupon (Max 10,000 Per Year)

For availing tax exemption, employees need to submit proof of expense else the amount will be included as part of Taxable Salary

Prerequisites

These are fringe benefits or non-cash benefits that some employees get due to their official position. Examples are:

• Official vehicle for personal use

• Rent-free accommodation

• Insurance premium on personal accident policy

The monetary value of perquisites gets added to the salary, which are taxable