Understanding the difference between CTC and In-Hand Salary

CTC (Cost to Company) and In-Hand Salary are two terms commonly used to describe different components of an employee's compensation package.

Here's a brief explanation of each term and the difference between them:

CTC, or Cost to Company, is the total amount a company spends to employ an individual. It includes not just the salary, but also various allowances, benefits, and other perks. In short, it's the entire package that the company offers to its employees.

In-Hand Salary, on the other hand, is the actual amount an employee receives in their bank account after deductions like taxes, Employee Provident Fund (EPF), and other contributions.

Understanding the difference between CTC and in-hand salary is crucial for budgeting and financial planning purposes.

Let's discuss the various deductions that contribute to the difference between CTC and in-hand salary, how to calculate in-hand salary, and the importance of knowing the difference for effective financial planning.

A. Deductions from CTC

Income tax:

• Income tax is a percentage of your income levied by the government based on your annual earnings.
• The tax rates vary depending on the income tax slab you fall under.
• Income tax is usually deducted at source by the employer and deposited with the government.

New Regime Tax Slabs (FY 20-21)

Professional Tax:

• Professional tax is a state-level tax levied on salaried individuals and professionals.
• The tax amount varies across different states in India, and not all states impose this tax.

Employee Provident Fund (EPF):

• EPF is a government-backed retirement savings scheme. It is mandatory for salaried individuals with a basic salary of up to ₹15,000 per month.
• Both the employee and employer contribute 12% of the basic salary towards EPF. This amount is deducted from the employee's CTC.

Other deductions: Apart from the above deductions, there might be other deductions such as health insurance premiums, group insurance premiums, and Employee State Insurance (ESI) contributions. These deductions vary based on an individual's employer and employment contract.

B. Calculation of In-Hand Salary

To calculate your in-hand salary, you can follow these steps:

• Determine your annual CTC.
• Subtract the annual employer's contribution to EPF from the CTC.
• Calculate the income tax based on your taxable income (use the income tax slab table provided above).
• Deduct professional tax, if applicable.
• Subtract any other deductions as mentioned in your salary slip or contract (e.g., health insurance premiums, ESI contributions).
• The remaining amount is your annual in-hand salary.
• To calculate your monthly in-hand salary, divide the annual in-hand salary by 12.

C. Importance of Knowing the Difference between CTC and In-hand Salary

Being aware of the distinction between CTC and in-hand salary is crucial for making informed decisions regarding your personal finances. This knowledge enables you to create accurate budgets, set realistic financial goals, and plan for various financial milestones.

Here are some reasons why understanding the difference between CTC and in-hand salary is essential:

• Accurate budgeting: Knowing your in-hand salary allows you to develop a realistic monthly budget that takes into account your actual take-home pay. This helps you live within your means, manage your expenses efficiently, and avoid financial stress.

• Setting financial goals: By understanding your actual in-hand salary, you can set achievable short-term and long-term financial goals.

• Loan eligibility: When you apply for a loan, banks and financial institutions consider your in-hand salary to assess your repayment capacity. Knowing your in-hand salary helps you gauge how much loan you can afford and the monthly EMIs you need to pay.

• Efficient tax planning: Being aware of the deductions from your CTC, such as income tax and EPF, allows you to plan your taxes efficiently. You can explore various tax-saving investments and deductions to minimize your tax liability and save more money.

• Career decision-making: Understanding the difference between CTC and in-hand salary can help you make informed career decisions. It enables you to compare job offers accurately, considering not just the CTC but also the various deductions and benefits associated with each offer. This knowledge ensures you choose a job that aligns with your financial goals and expectations.

In conclusion, By understanding your actual take-home pay and the deductions involved, you can better manage your personal finances and work towards achieving your financial goals.

Interested in learning more? Read this post to understand the components of your salary.