CTC is not your salary, myth versus reality: this is what you really earn

Last update:02 December 2024, 12:06 IST

Know how to decode your CTC and maximize your salary on hand. Know what you really take home versus what your employer pays

Understanding the difference between CTC and salary on hand is crucial to effectively managing your finances. (Representative image)

Many employees in India often confuse CTC (cost to business) and salary on hand, leading to misconceptions about what they take home versus what their employers spend. Understanding the difference is crucial for better financial planning and avoiding any surprises when it comes to monthly expenses.

CTC and salary in hand

While CTC represents the total amount an employer spends on an employee each year, salary on hand is the amount that lands in the employee’s pocket after deductions. This often leads to misconceptions, with many assuming that their CTC translates directly to their take-home pay.

Here’s a myth-busting guide to setting the record straight.

Myth 1: CTC = Salary on hand

Reality: CTC is not equal to your salary on hand.

CTC includes the total cost the company incurs for an employee over the course of a year, while salary on hand is what you actually receive after deductions.

CTC includes things like basic salary, allowances (HRA, LTA), insurance, employer EPF contributions and even performance bonuses.

Salary in hand is the amount remaining after deductions such as Employees Provident Fund (EPF), income tax, professional tax and other benefits.

Myth 2: Higher CTC means higher salary on hand

Reality: Not necessarily.

A high CTC does not automatically translate into a high salary.

Variable components: A significant part of the CTC could take the form of variable remuneration, such as bonuses, which would not always be paid.

Allowances: Some allowances, like Rent Allowance (HRA) or travel reimbursements, may not be included in your salary on hand if they are not taxable or tied to specific expenses.

Myth 3: The entire CTC is paid to the employee

Reality: The CTC represents the total expense spent on the employee, but much of it is not paid directly.

Employer contributions: Employer contributions to Provident Fund (PF), gratuity and insurance are part of the CTC, but they are not part of your salary in hand.

Bonuses and stock options: Some parts of CTC, like bonuses or stock options, are paid based on performance or over time and are not always reflected in monthly payments.

Myth 4: Deductions include taxes only

Reality: There are several other deductions besides taxes.

Provident Fund (FP): Both the employee and the employer contribute to the PF, thereby reducing your salary on hand.

Professional tax: Some states levy a business tax, which is deducted from your pay.

Insurance: Health and life insurance premiums can be deducted.

Other deductions: Loans or advances, voluntary contributions to schemes, etc. can also reduce your take-home pay.

Myth 5: The salary on hand is always lower than the CTC

Reality: In some cases, your salary on hand may be higher than your CTC.

Salary structure: If the company structures the CTC intelligently (for example, including a significant portion of the CTC in the form of tax-free benefits like meal vouchers, transportation, etc.), your salary on hand may end up being higher.

Exemptions and deductions: Taking advantage of tax saving instruments under sections like 80C (ELSS, PPF) or 80D (health insurance) can increase your salary in hand.

Myth 6: The salary on hand does not reflect my entire remuneration

Reality: Your salary in hand is only part of the total compensation package.

Although salary in hand is the immediate, spendable amount, CTC includes all elements of remuneration, including insurance, gratuities and bonuses, which can be paid later, thereby providing you with long-term financial benefits .

How to calculate and understand your net salary?

Break down your CTC: Know the elements: base salary, allowances, taxable benefits and non-taxable benefits.

Identify the deductions: Consider deductions such as PF, income tax and insurance.

Consider tax saving opportunities: Invest in tax saving programs to reduce taxable income and increase your salary on hand.

Understanding the difference between CTC and salary on hand is crucial to effectively managing your finances. Don’t fall for common myths: always ask for a clear salary breakdown and use available exemptions to maximize your take-home pay.

Disclaimer: The views and investment advice of the experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.