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HRSUCCESSTALK:MusttoknowaboutdesigningCTCCosttoCompanyofanemployee
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Monday,1April2013

MusttoknowaboutdesigningCTCCosttoCompanyofan
employee

TopicwiseBlogList

CompensationandTaxation(4)
HRDiscussions(32)
CTCCosttoCompany

HumanResourceDevelopmentandManagement
(4)
LabourLaws(8)

CTCThistermisconfusingformanypeopleandmypostwillhelpthemtounderstandthisbetter.
Definition of Cost to Company differ from company to company and every company has its own
structure and salary components which company wants to make part of CTC. For simple
understanding,letmedefineCTCwhichincludescostwhichcompanyincuronemployeeinformof
statutory contributions, reimbursement, benefits and sometime administrative costs other than
Grosssalaryofemployee.

PerformanceManagement(11)
Recruitment(8)
TrainingandDevelopment(2)

HRSUCCESSTALKFORUM

We will understand all the possible components which company can put in CTC and what is the
impactofthesecomponentsonyourinhandandtaxliability.

CTCincludesvariouscomponentslike:
Fixed Salary : It includes Basic, DA, HRA, Conveyance, City compensatory Allowance, Special
Allowancesetc
Variable Salary : It includes Performance based incentive, Sale based incentive and Profit based
bonus.
Reimbursements : It includes reimbursement of conveyance, medical, telephone, Books and
Periodicals,LeaveTravelAllowance.
Contributions: It includes the benefits offered by the company like Provident Fund, ESI,
Superannuation, Gratuity, Statutory Bonus, Medical Insurance, Accident Insurance, Leave
encashmentetc.

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StockOptions:StockOptions

FixedSalary:

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HRSUCCESSTALK:MusttoknowaboutdesigningCTCCosttoCompanyofanemployee
GovindNegi
Asthenameimpliesitisfixedsalaryofemployeeandgenerallylinkedwithattendanceornumberof
payabledaysofemployee.Thisismajorportionofemployeeinhandsalary.

Addtocircles

Basic:
Generally, it is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable. Many
statutory components such as Provident Fund, Bonus and Gratuity etc and other benefits as per
companypolicysuchasLeaveTravelAllowanceetc.arerelatedwithBasicsalaryhenceincrease
anddecreaseinBasicmayimpactCTCofemployee.
DADearnessAllowance:
Very few private companies use it as salary component. It is mostly given to government
employees. In Private companies, in case DA is missing from salary component then consider
BasicasBasic+DA.DearnessAllowanceispaidtolowertheimpactofinflation.
HRAHouseRentAllowance:
HRA is paid to employee to meet expenses against paying rent of a home. Normally companies
keepit40%to50%ofBasicsalarydependinguponwhereyoulive.Incaseyoustayinmetrocities
thenHRAwillbekept50%ofBasicsalaryandincaseyoustayinnonmetrocitiesthenHRAwill
be 40% of Basic salary. It is due to the fact that HRA is non taxable salary components and its
taxabilitydependsuponwhereyoulive.
HRAisexemptedfromtaxableincome.
Leastoffollowingisexempted:

ActualHRAreceived
50%ofsalary(basic+DA)ifresidinginametropolitancity,orelse40%
Theamountbywhichrentexceeds1/10thofsalary(basic+DA).Insimplewords(Rent
Paid10%ofBasic)

Example:Letstakeexampleofanemployeewithfollowingfigures.
Basicsalary:10,000/permonthlivesinDelhi(Metrocity)
HRA:5000(50%ofBasic)
RentPaid:4000
TocalculatehisHRAtaxexemption,letfindoutallthreecriteria:
ActualHRAreceived:5000
50%ofBasic:5000
Rentpaid10%ofBasic:3000(4000i.e.RentPaidminus1000i.e.10%of
Basic)
(MinimumofabovethreeisRs3000/henceemployeewillgettaxexemptiononRs3500per
month.)
FromaboveexampleitisevidentthatHRshouldkeepHRAas50%(40%incaseofnonmetro)so
thatemployeecangetmaximumbenefitofHRAfortaxexemption.
LetsunderstandwhatIamtryingtosayhere.ForexampleifHRstructuresaboveemployeeHRA
wronglyandkeepitRs2000/whichmeansnewstructurewilllooklikeasbelow:
Basicsalary:10,000/permonthlivesinDelhi(Metrocity)
HRA:2000
RentPaid:4000
TocalculatehisHRAtaxexemption,letfindoutallthreecriteria:
ActualHRAreceived:2000
50%ofBasic:5000
Rentpaid10%ofBasic:3000(4000RentPaidminus100010%ofBasic)
MinimumofabovethreeisRs2000/henceemployeewillgettaxexemptiononRs2000permonth.
Henceitisclearthatthisisnotataxfriendlysalarystructure.

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GovindNegi
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BlogArchive

2014(1)
2013(45)
September(1)
August(3)

ConveyanceAllowance:
ConveyanceallowanceispaidtoemployeeagainstexpensetocommutebetweenOfficetoHome.
ConveyanceallowanceisnontaxableuptoRs800/permonth.IfanemployeegetsRs1000/per
month,asconveyanceallowance,thenRs200permonthwillbetaxable.Hencenormallyyouwill
findmaximumRs800underConveyanceallowancehead.Employeeneednottosubmitanybillfor
thesame.
CCACityCompensatoryAllowance:

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July(1)
June(7)
May(4)
April(6)
FrequentlyaskedquestionsonPaymentof
BonusAct...
UsefulwebsitesonHRHumanResource
Management
InsightsofEDLIEmployee'sDepositLinked

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Insuran...

This is paid to employee to compensate cost of living of a particular city. This is basically a fully
taxablecomponent.Instandardform,CCAvaryfromcitytocityandgradetograde.CCAdepends
uponcompanypolicy.
Example:BelowisanexampleofCCAforDelhiandJaipurforGrade1and2.

FAQrelatedtoLeaveTravelAssistance
HowtodesignLeaveTravelAssistanceLTA
policy...
MusttoknowaboutdesigningCTCCostto
Companyo...
March(6)

Location
Delhi
Delhi
Jaipur
Jaipur

Grade
Grade1
Grade2
Grade1
Grade2

CCA
3000
2500
2000
1500

February(6)
January(11)

PLAYONLINEGAMESATGAMESHULK

WheneveranemployeegetstransferredfromonelocationtoanotherCCAalsogetschanged
accordingly.Thisisalsoaspercompanypolicy.
SpecialAllowance:
This allowance component is mainly used to adjust rest of the amount which is to be given to an
employee. For example, company wants to give Rs 20000 as gross to an employee and company
hasallocatedRs18000asBasic,HRA,ConveyanceallowanceandCCAthenRs2000willbeput
underSpecialallowance.Itisfullytaxableallowance.
Anyothertypeofallowance:
Company as per company policy can also make some other allowances which can be paid to
employees. For example Uniform washing allowance, Attendance allowance etc. All these
componentsaretaxable.

VariableSalary:
As the name implies variable salary is not fixed and depends upon performance of an employee.
Now a days, many companies are keeping this as part of their employee CTC. Earlier, only
employees related to sales or profit making department use to have variable component in their
salarybutnowevenemployeerelatedsupportfunctionslikeHR,admin,QA,Trainingetcalsohave
variable components in their salary. Companies are not willing to pay more fixed but open to pay
highervariablepayasvariableisrelatedtosaleandprofitabilityoforganizationandcompanyhasno
problem in paying money to employees if company is making profit. This is the reason that fixed
salary is decreasing and variable pay percentage is increasing day by day. Even some of the
companiesmakeFixedandVariablepayas5050forsaleprofile.
PerformanceBasedIncentive:
Performancebasedincentive,ifmadepartofCTC,normallyknownasvariablepay.Everycompany
has different policy to give performance based incentive or variable pay. Some companies may
consider your monthly performance rating to give this variable amount. Please refer link How to
Build mature performance managementsystem without any automation software? to know
moreaboutperformanceratingsystem.
Example: Below is one of the sample sheet which shows variable pay % given to an employee
basishisrating.
Rating
5
4
3
2
1

Variablepay%
150%
125%
100%
70%
0%

Somecompanieslinkitwithmajorkeydeliverableofanemployee.
Example:IncaseofaRecruitmentExecutiveprofile,variablepaycanbepaidifrecruitment
executiveachievessomekeydeliverable.Oneoftheexampleasbelow:
If100%positionsareclosedwithin30daysTAT:150%ofvariablepay
If90%positionsareclosedwithin30daysTAT:100%ofvariablepay
If80%positionsareclosedwithin30daysTAT:70%ofvariablepayand
soon

SaleBasedIncentive:
SalebasedincentiveisnormallyoverandaboveCTCbutsomecompanymakesitpartofCTC.In
anycase,salesbasedincentiveisgiventoemployeeswhoareinsalesprofile.

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HRSUCCESSTALK:MusttoknowaboutdesigningCTCCosttoCompanyofanemployee
ProfitlinkedBonus:
Inmostofcasesitispaidannually.Companylinkprofitlinkedbonuswithprofitabilityofcompany
orprojectordepartment.Thisalsoworksasretentiontoolandmotivatesemployeetoensurehigher
profitabilityatthesametime.
Designofperformanceincentiveschemeisveryimportantandmanyfactorsshouldbekeptinmind
while framing one. Policy maker should give due importance to historical data, persons capability,
product and service sale ability market trend etc so that incentive plan framed should not look un
realistic otherwise employee will feel that he will never be able to achieve variable pay which is
madepartofhisCTCandinthiscaseperformancebasedincentivewilllooseitspositives.

Reimbursement:
Reimbursementispaidtoemployeeagainstsomeexpensesandemployeeneedtosubmitbillsfor
thesame.Everyreimbursementshouldbeseendifferentlyincontextoftax.
MedicalReimbursement:
Medical reimbursement is paid to employee to meet expenses on medical. It is non taxable up to
15000 per annum. It is up to company whether company wants to pay it monthly, quarterly, half
yearly or annually. Amount paid above 15000 in a year will become taxable. Employee need to
submit medical bills in support of medical expenses. In absence of medical bills it will become
taxable income. Employee can submit bills of medical expenses made on spouse, child and
dependentparents.
Many things related to medical reimbursement payout depend upon company policy. For example,
whetheremployeecanstartclaimingmedicalreimbursementfromfirstmonthoraftercompletionof
certainperiodoftime,whetheremployeewillgetmedicalreimbursementincaseofnonsubmission
of medical bill even if it is taxable, whether medical reimbursement is linked with employee
attendancebyanywayetc.
LTALeaveTravelAllowance:
Leave Travel Allowance is also known as Leave Travel Concession (LTC) which is paid for travel
costincurredbyemployeeintravel.EverycompanyhasitsownruletodecideonamountofLTAto
be given to an employee. A company may prefer to keep it equal to monthly basic salary of
employee or make it fixed depending upon grade and native place of employee. There is no, as
such,guidelinesfromgovernmentonLTAamount.Itcanbeanyamountwhichemployerwantsto
keepasLTA.
It is a non taxable income but there are some rules which should be kept in mind while taking
benefitofLTAfortax.
EmployeeneedtotakeleaveespeciallyPrivilegeleave.
Only travel cost will be reimbursed which includes travel cost of spouse, child and
dependedparents.
Only amount paid against travel cost will be non taxable. For example if my LTA
eligibility is Rs 10000/ and employee spends Rs 5000 in travel and submits bills of
samethenonlyRs5000/willbenontaxable.RestRs5000/willbetaxableincome.
LTA is exempted for two journeys in a block of four years. Current block is 20102013
andnextblockwillbe20142017.
Journeyshouldbemadethroughshortestpathbetweentwodestinations.
ReferthepostHowtodesignLeaveTravelAssistanceLTApolicyofyourcompany?
TrainingReimbursement:
It is provided to employee for expense incurred on professional training. It is non taxable up to Rs
14000/perannumandemployeeneedstoprovidebillsofsame.
Mobile/TelephoneReimbursement:
Mobilereimbursementispaidtoemployeeagainstexpenseincurredforuseofmobile/telephonefor
official purpose. Employee need to submit bill for same. Employer can fix an amount for such
reimbursement.Suchamountshouldbelogicalandlinkedwithemployee'sprofile
BooksandPeriodicals:
This is paid to employee to reimburse expense made on purchase of Books and periodicals. It is
nontaxableifbillsaresubmitted.
ChildrenEducationAllowance:
ItisexemptedfromtaxuptoRs100permonthperchildfortwochildren.
ChildrenHostelAllowance:

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HRSUCCESSTALK:MusttoknowaboutdesigningCTCCosttoCompanyofanemployee
ItispaidtomeetexpensesforChildrenhostelallowance.ItisexemptedfromtaxuptoRs300per
monthperchildfortwochildren.

FoodcouponsorMealPass
Itisgiventoemployeetogetmealduringworkinghours.Rs50/permealistaxfree.Pleaseread
my blog post 5facts regarding Food coupons / meal pass and its tax implications to know
more.

Contributions:
Contribution means contribution made by employer for employees long term saving schemes or
socialbenefitsschemeasperstatutorycompliance.
EmployeeProvidentFund:
Itiscontributionmadebyemployer(12%ofBasicsalary)againstEPF.Itisstatutoryobligationat
the part of employer. Employee gets benefit of PF deduction (12% of basic) at his part under
Section80Cofincometax.TherearemanyotherfactsrelatedtoProvidentfund.
Toknowvisitfollowingtwoposts:
PFFundamentalseveryoneshouldknow!!
17interestingFactsaboutPF(ProvidentFund)actinIndia!!
EmployeralsokeepsPFAdmin(1.61%ofBasic)aspartofCTCwhichemployerneedstopayto
RPFCotherthan12%ofBasicsalary.
ESIC(EmployeeStateInsuranceCorporation)
Employer need to deposit 4.75% of gross salary of employee in case employees gross salary is
lessthan15000.HenceemployerkeepsitaspartofEmployeeCTC.
1.75%ofgrossgetdeductedfromemployeesGrosssalarywhichdecreaseshisinhandsalaryby
thatamount.ThereisnotaxbenefitassociatedwithESIcontributionordeduction.

Gratuity:
Gratuityispaidtoemployeeonceemployeecompletes5yearsofcontinuousservicesorincaseof
employeedeathirrespectiveofcompletionof5years.Itisstatutoryliabilityofemployerhencemany
employerskeepitinemployeeCTC.Itisoneofthemostdebatedtopicswhetheremployershould
keep gratuity amount as part of CTC or not? You can refer my post which can help you get many
otherquestionsrelatedtogratuityi.e.13factsoneshouldknowaboutGratuity!!
Employee gets 15 days salary for number of years completed as gratuity. Hence gratuity taken in
CTCis@4.81%ofBasic.

Gratuitypaidtoemployeeisexemptedfromtax.Leastoffollowingisexempted.
Actualgratuityamountpaid
15dayssalaryforeachyearofcompletionor4.81%ofBasicmultipliedwithnumberof
monthscompleted.
Rs10Lacs
StatutoryBonus:
ItisstatutorybonuswhichispaidtoemployeeswhosebasicislessthanorequaltoRs10000/.
Minimumbonuspayableis8.33%ofbasiccappedatRs3500/i.e.Rs292/andmaximum20%of
BasiccappedatRs3500/.EmployerkeepsitaspartofCTC.
GroupMedicalInsuranceandAccidentInsurance:
Employertakesmedicalandaccidentalinsuranceforemployeewelfarehenceemployerkeep
premiumpaidagainstsuchinsurancesinemployeeCTC.LearnHowtoreducemedicalinsurance
premiumcostbycontrollingclaimratio.

StockOptions:
Nowadays,manycompaniesprovidestockoptionstoemployees.Thisoptionismainlygivento
topmanagementemployees.Thishelpscompanytokeeptheiremployeeengagedtowards
companygrowth.Itisbeneficialforemployeeincasecompanyisgrowing.Theirstockvaluecan
increaseinthatcase.

Conclusion:

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HRSUCCESSTALK:MusttoknowaboutdesigningCTCCosttoCompanyofanemployee
Ifyouknowaboutthesecomponentsandhowthesecomponentswillimpactyouaspersonoryour
employeesasHRthenyouwillbeabletomakeyourcompensationpackageinsuchawaythat
suitstoemployeesneed.
Forexample,
IfanemployeewhoseCTCislessanddonotfallintaxrangethenHRcanstructurethe
CTCinsuchawaythatgivesmoreinhandtoemployee.
IfanemployeewhoseCTCishigherandfallsundertaxrangethenHRneedtoprepare
bestpossibletaxfriendlystructuresothatemployeecangetmaximuminhandatendof
financialyear.
CurrentTaxslabsareasbelow:
IndiaIncometaxslabs20142015forGeneraltaxpayersandWomen
IncometaxSlab(InRs)inaFY
0to2,50,000/
2,50,001/to5,00,000/
5,00,001to10,00,000/
Above10,00,000/

Tax
Zero
10%
20%
30%

IndiaIncometaxslabs20142015forSeniorCitizen(60to79years)taxpayersandWomen
IncometaxSlab(InRs)inaFY
0to3,00,000/
3,00,001/to5,00,000/
5,00,001to10,00,000/
Above10,00,000/

Tax
Zero
10%
20%
30%

IndiaIncometaxslabs20142015forVerySeniorCitizen(Aged80andabove)taxpayersand
Women
IncometaxSlab(InRs)inaFY
0to5,00,000/
5,00,001to10,00,000/
Above10,00,000/

Tax
Zero
20%
30%

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PostedbyGovindNegiat05:34

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Labels:CompensationandTaxation,HRDiscussions

139comments:
RajKumarsaid...
HiSir,
Excellentinsightmaterial.
Regards
Rajkumar.T
1April2013at21:59

GovindNegisaid...
DearRaj,
Thanksforyourappreciation.
2April2013at00:49

http://hrsuccesstalk.blogspot.in/2013/04/musttoknowaboutdesigningctccost.html

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