CTC, Gross Salary and Net Salary Explained

Financial Planning

CTC, Gross Salary and Net Salary Explained

By Jupiter Team · · 5 min read

If you have just started working and are confused as to how much exactly you will earn at the end of the month, don't worry. We'll explain all that there is to know about CTC and the maths of salary packages in this article.

What Is CTC?

CTC stands for "Cost to Company", which, in accounting and finance, means the total cost that a company incurs on hiring an employee. It is the amount that each company spends on its employees from the company's point of view.

CTC is cumulative of several smaller amounts. Some make up the salary that an employee receives in their account, while others are intangible expenses that a company spends on its employees.

Simply put,

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

The components of CTC have been explained in detail later.

What Is Gross Salary?

Gross salary is often confused with CTC. However, there's a difference between the two.

Gross salary is the amount that is payable to the employee before the deduction of taxes and after the deduction of the Employee Provident Fund (EPF) contribution and gratuity subtracted from the CTC.

Direct and indirect benefits, overtime salary, and other differentials are included in gross salary.

What Is Net Salary and In-Hand Salary? How Do They Differ From Gross and Net Salary?

Net salary is the salary that an employee receives in-hand or in their bank account after the tax deduction.

Net Salary = CTC - Provident Fund Contribution - Gratuity - Income Tax (TDS)

So, the difference between CTC and in-hand salary lies in the PF contribution, gratuity, and income tax deductions.

How to Calculate CTC, Gross and Net Salary?

Calculating CTC, gross and net salary is pretty simple if you have identified all the components correctly and accurately.

We'll suppose that Disha has applied to Firm X for a job and received a pay package, of which the details are given below:

Salary Component Amount (Annual, INR)
CTC 7,00,000
Basic Salary 5,00,000
Travel Allowance 50,000
House Rent Allowance 45,000
Medical Allowance 45,000
Leave and Travel Allowance 60,000
Provident Fund Contribution 84,000
Gratuity 29,629

Now, Disha's CTC is the total of all the direct benefits listed, which amounts to INR 7,00,000. Reduce that amount by the gratuity and PF contribution to arrive at the gross salary.

So, as per the gross salary formula:

Gross Salary = 7,00,000 - (84,000 + 29,629) = INR 5,86,371

Now, subtract from this value, the total income tax, which is calculated at 5% from INR 2.5 lac to 5 lac and 10% from INR 5 lac to 7.5 lac.

Net Salary = 5,86,371 - 33637 = INR 5,52,734

What Are the CTC Benefits and Allowances in India?

Direct Benefits:

Direct benefits include the amount that is explicitly paid by the employer to the employee. They include:

1. Basic Salary

The basic salary is an amount that makes the core of an employee's salary. It constitutes a major chunk of the salary that an employee receives, sometimes more than 45% of the total amount.

2. Dearness Allowance

Inflation is the phenomenon that causes the price of general goods to rise by a certain amount every year. If the general price increases, so should an employee's salary if they are to survive comfortably.

Hence, employers provide a dearness allowance - a basic cost of living adjustment that alleviates the pinch of inflationary pressure one might feel in their pockets.

3. Conveyance Allowance

Employees have to travel to and from their residence to their workplace each day, and over the course of a year, the cost incurred for this commute racks up to a large amount.

Therefore, most employers include a conveyance allowance to reimburse the cost that an employee incurs on their commute. It generally makes up a small percentage of the total salary.

This allowance is provided only in cases where the employer does not provide a means of transportation to the employee.

4. House Rent Allowance (HRA)

HRA, comprising roughly 10-15% of the total in-hand salary, is an amount paid by the company to reimburse the employee if they are living in a rented space. This allowance usually entails certain tax benefits too.

HRA is a part of an employee's salary, irrespective of their rent status. In case you are actually paying rent, you can claim the amount later, which is tax-free.

But if not, the HRA becomes just another part of your salary. You can spend this amount as you please, but the amount is fully taxable.

5. Medical Allowance

Medical allowance, like HRA, is an amount paid by the employer to the employee every month, irrespective of their health status. The employee can use this amount as they please.

Thinking that medical allowance is the same as medical reimbursement is a common misconception. These terms are often used interchangeably, but they imply two very different types of payments.

While medical allowance is paid by the employee every month as a part of one's salary, medical reimbursement is used to refer to the amount that is paid by the employee against the submission of relevant bills. This is a "reimbursement", and, therefore, warrants proofs of payment.

Other than that, under the Income-tax Act, 1961, medical allowance is a non-exempted payment, making it fully taxable. On the flipside, medical reimbursement falls under the ambit of Section 80D, and an amount up to INR 15,000 is tax-free.

Indirect Benefits:

The second component, indirect benefits, comprises payments made by the employer on behalf of the employee.

1. Health Care Costs

Formal salaried employees are more often than not provided health care benefits, which includes health insurance. Sometimes, this insurance covers the employee as well as their family members.

2. Taxis/Buses for Commute

Although we've already listed conveyance allowance as a part of direct benefits, that amount is only paid when there's no conveyance provided by the employer. The other side of that is employers shelling out money on their own to charter buses or taxis for their employees.

3. Low-Interest Loans

Bank employees are allowed loans at a special, subsidised rate.

4. Meals and Snacks

Modern office spaces are equipped with meal and snack outlets for the employees to enjoy. This perk is paid for by the company on the employees' behalf.

5. Office Space Rent

Some companies attribute a certain amount of rent to the space that a particular employee is using in the office. This is termed office space rent.

For instance, if the firm spends INR 1,00,000 on rent each month, and there are 20 cubicles in the office, the office space rent on each employee turns out to be INR 5,000.

6. Company Leased Accommodation

Many firms offer to find and pay for the residence an employee might take, especially if they are relocating for the job. This is called Company Leased Accommodation, and the rent for that place is paid for by the firm.

Savings Contributions:

1. Gratuity Amount

Gratuity is paid at 4.81% per annum as per Indian statutes. Withdrawal is prohibited before 5 years, and if an employee leaves the firm before completing 5 years, they lose their accumulated gratuity.

2. Employer Provident Fund Contribution

12% of the basic salary of an employee goes towards their PF account directly from the employer.

3. Superannuation

A pre-defined amount is contributed by the employer to an account in the employee's name. This can be withdrawn at the time of retirement.


Net salary is the amount that an employee receives at the end of the month, and it can vary a great deal from the initial CTC because of a lot of elements.

CTC includes within its purview both explicit and implicit costs that a firm incurs on a worker, some of which might not be directly paid to the worker, but they do benefit from them.

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