Personal Finance

Why all pay is CTC, but all CTC is not pay

Anand Kalyanaraman | Updated on June 13, 2020

The maths is not too complex, but it’s not all child’s play

The past few months have been a bummer for many, including the salaried folk.

Impacted by the Covid-19 scourge, several businesses have cut the pay of their employees. This would have reduced the CTC that employers incur on employees.

Another recent development — the reduction in EPF contribution rate from 12 per cent to 10 per cent for three months — could also have potentially impacted the CTC of employees (but thankfully, didn’t). To understand why, first let’s look at what CTC means.

Key differences, reasons

CTC — short for Cost-to-Company — is the sum that your company spends on you. Note that it is not the sum that the company pays you. What you get (the take-home pay) is not what you see in your offer letter (the CTC promised to you). The take-home pay is often lower than the CTC; the latter has a broader scope than the former.

To paraphrase an old chestnut, all pay is CTC, but all CTC is not pay. This is an important difference and there are several reasons for this difference.

First, the CTC is a pre-tax amount. Your take-home pay is after deduction of tax on salary. Depending on your annual taxable income, the tax can be 5-30 per cent of your salary; surcharge (if applicable) and cess on tax also reduce the take-home pay.

Next, some contributions made and expenses incurred by your company may not reflect in your payslip, but they do benefit you. This forms part of the CTC.

Consider the EPF (Employees’ Provident Fund), for instance. Each month, your employer matches your compulsory contribution to the EPF. Your contribution as an employee — usually 12 per cent of your basic salary and dearness allowance (DA) — gets reduced from your monthly gross pay. The employer’s contribution — also 12 per cent of your basic and DA — forms part of your CTC. The employer’s contribution does not form part of your gross salary or get paid to you each month, but it does help build your retirement nest egg.

Also, if your employer provides group health insurance or life insurance to employees, a portion of the insurance premium may be included in your CTC.

Then, there are day-to-day benefits that the company could be giving you in kind — such as free or subsidised food, transport facilities, or food vouchers.

These could form part of the CTC, though they may not reflect in your payslip.

Reimbursements that the company gives you on medical, phone and fuel expenses on submission of bills also form a part of your CTC.

Besides, the leave travel allowance, given as reimbursement against travel bills or at the end of the year, adds to the CTC; some companies may be paying this monthly, too.

Also, if your employer provides you perquisites such as accommodation and vehicle for usage, that would count in your CTC though they will not reflect in your payslip.

Uncertain sums

Then, there are sums that could form part of your CTC, but whose receipt is uncertain.

Gratuity and bonus (variable pay) are good examples.

The company may be setting aside a sum annually towards your gratuity payment.

But you get the gratuity payment only if you continue with the company for five years or more. Quit before that and you get nothing. So, while it may be shown as part of your CTC, the gratuity may not necessarily be paid to you.

The annual bonus amount can also be a chimera. If your offer letter holds out the carrot of a bonus at the end of the year, that could bump up the CTC. In most cases, the bonus is a variable pay component and the final payout may depend not just on your performance but also that of your company’s.

So, you may not get the entire amount you were promised in your CTC even if you are a top performer.

This could be especially true in the current circumstances — with many businesses doing badly, they could cut the bonus payment, or worse, not pay any bonus to employees.

A bit too far, sometimes

Some companies take the CTC construct a bit far. They could include, for instance, leave encashment as part of CTC. And some take such stretching to new lengths by including even training expenses as part of CTC. Not fair, but often there is not much employees can do about such showcasing.

Reducing the gap

There are some ways though to help lessen the gap between your CTC and your take-home pay. Check with your employer whether the package can be tweaked to include more direct, regular, in-cash components instead of perks in kind.

Do this in a tax-efficient way, especially if you opt for the old tax regime that allows many deductions and exemptions. For instance, if you are paying rent, ask for a higher amount as House Rent Allowance (HRA) to get more tax breaks. Reimbursements for expenses incurred also don’t attract tax. On your part, invest and spend on tax-saving instruments such as those under Section 80C (up to ₹1.5 lakh a year), Section 80D (health insurance premiums) and Section 80CCD (additional NPS contribution of up to ₹50,000).

Cut to the present

A pay cut, as many have faced in recent times, clearly reduces the CTC since the employer reduces the gross monthly salary and take-home pay falls. But here, too, there are ways to make the best of a not-so-pleasant situation.

Many employers are careful about this, but in case yours is not, ask that the pay cut be effected through a decrease in other allowances, and not through a decrease in basic pay or DA. That’s because basic pay and DA have a bearing on other benefits, too, such as EPF and gratuity.

If your basic pay and DA come down, your gratuity and EPF come down, too. This could hurt your long-term and retirement benefits.

The Centre’s move to reduce for three months (May, June and July 2020) the EPF contribution rate from 12 per cent to 10 per cent of both employees and employers has two implications.

A reduction in your (employee’s) contribution to the EPF will increase your monthly take-home pay (since it will mean a lesser cut from your gross pay) and reduce your contribution to your retirement corpus, but it will not impact your CTC.

But if your employer contributes less to your EPF account, your CTC will fall since they are putting less in your retirement account than before.

Assume your salary is ₹200 comprising Basic and DA of ₹100, and other allowances of ₹100. Each month, you contribute ₹12 (12 per cent of Basic and DA of ₹100) to your EPF account, and your employer makes an equal contribution (₹12). So, you take home ₹188 (₹200 less your contribution of ₹12), while your retirement corpus is filled with ₹24 (total of your and employer contribution of ₹12 each). The employer would be showing the CTC as ₹212 (₹200 plus his EPF contribution of ₹12).

Now, if the EPF contribution rate is reduced to 10 per cent from 12 per cent, your take-home pay will increase to ₹190 (₹200 less ₹10) from the earlier ₹188 (₹200 less ₹12). At the same time, your employer, too, will be contributing only ₹10 to your EPF account instead of the earlier ₹12. That will reduce the CTC from ₹212 to ₹210 (₹200 plus ₹10).

The amount that goes into the retirement corpus will be ₹20 instead of ₹24 earlier.

Thankfully, the Centre has said that employers will have to compensate employees in case of fall in the CTC due to reduction in their (employer) EPF contribution. That is, if the employer reduces their EPF contribution from 12 per cent to 10 per cent, they will have to increase other allowances so that the CTC remains the same. Also, both employers and employees have been given the option to continue with their EPF contribution at 12 per cent (instead of 10 per cent).

Going by the pay-slips for May 2020, it appears that some employers have chosen to continue with the EPF contribution rate at 12 per cent, and have also retained the employee contribution at 12 per cent.

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Published on June 13, 2020
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