Difference between CTC and take home?

Posted by: xsprince on: April 21, 2010

• In: Finance
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What is the difference between CTC and take home?
As you probably gauged, CTC is not the same as take home. Your take home is always lower than your CTC. Besides examples mentioned above, there are two major components that eat into the CTC. They are:
1. Tax liability
The company calculates your tax and deducts it every month from your CTC. This includes income tax as well as professional tax.
2. Contribution to PF
Here is the confusing part. Provident fund contribution has two sides – the employer’s contribution and employee’s contribution. The employer’s contribution is included in the CTC as it is a cost that the company incurs to employ you. This is usually 12 per cent of the basic salary. However, this contribution is not paid out to you monthly. It is directly deposited in your PF account and paid to you when you retire or resign.

There is also employee’s contribution to PF. This amount (usually 12 per cent of the basic salary) is deducted from your monthly salary and deposited in your PF account.

Now let us calculate how CTC becomes take home.
Step 1: Calculate tax:

Particulars	Taxable amount (see notes below)
Basic	480,000 (1)
Dearness Allowance	48,000 (2)
Entertainment Allowance	12,000 (3)
HRA	52,800 (4)
Conveyance	2,400 (5)
Overtime Allowance	12,000 (6)
Medical Reimbursement	Nil (7)
Gross taxable salary	607,200
Tax	86,685 (8)
Net annual salary	205,155
Net monthly salary	43,376

Notes on tax calculation:
Let’s look at it step by step.
1. Basic salary is fully taxable under Section 17 of the Income Tax Act, in this case Rs 40,000 is fully taxable.

2. Your Dearness Allowance and overtime allowance are fully taxable.

3. The taxability of entertainment allowance depends on the company policy. In this case, this is wholly taxable. However, in some companies, entertainment allowances become tax free if bills are submitted to the extent that these expenses were used towards office purposes.

4. House Rent Allowance (HRA) exemption is applicable only if you are living in a rented house and not in your own house. HRA calculation in this case is as follows:
The minimum of the three amounts will be exempt from tax:
a. Actual HRA allowance in the salary package, that is Rs 96,000
OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 – 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA.

So, in this case it would be Rs 211,200 (40% of 528,000)

The least amount of the three would be Rs 43,200, which is exempt. That means the actual taxable amount would be
Rs 96,000 (less) Rs 43,200 = Rs 52,800

5. Conveyance allowance of Rs 9,600 per annum is exempted from tax. So, in this case Rs 2,400 will be subjected to tax. Again, this is according to her company policy. In some companies, if the balance is used for official purposes, the amount becomes tax free.

6. Overtime allowance is fully taxable.

7. Medical reimbursements, if substantiated with bills, are exempt to a limit of Rs 15,000 annually. So, one can produce medical bills for a maximum of Rs 15,000 to her employer. If you are allotted a annual medical reimbursement of Rs 20,000, Rs 15,000 would be tax exempt if you submit bills, which means you’d have to pay tax on the remaining amount of Rs 5,000.

Some other allowances and reimbursements which may be part of your package are food coupons (sodexho, ticket restaurant), phone reimbursements, books and periodical reimbursements etc. The taxation of this would depend on your company policy.

8. In this case salary falls in the highest tax bracket. This tax amount includes education cess too. Of course, this calculation is done assuming that one does not make any tax saving investments. If she invests the maximum permissible limit of Rs 1 lakh, her tax comes down to Rs 55,785.

Step 2: Deduct provident fund and professional tax
Out of the CTC, employer’s contribution to PF will not be included in the take home, as discussed earlier. Employee’s contribution, that is one’s contribution would have to be deducted.

Monthly take home would be:

Net monthly salary (post income tax) Rs 43376
less contribution to provident fund Rs 4,800
less Professional tax Rs 200

Monthly take home Rs 38,376

So while monthly CTC was Rs 61,050, take home is just Rs 38,376

How can one increase take home?
One can plan taxes and increase the take home. If one invests Rs 1 lakh (the limit under section 80 C) in tax saving instruments like PPF, ELSS etc, annual tax comes down to Rs 55,785.

Gross taxable salary	607,200
Tax	55,785
Net annual salary	551,415
Net monthly salary	45,951
(Less) Pf contribution	4,800
(Less) Professional tax	200
Monthly take home	40,951

It is also important that while she changes jobs, she should take some time to understand the package offered to ensure that the CTC is friendly and ensures maximum take home.