Cost to Company (CTC) : Meaning, Calculation and Examples

What is CTC?

CTC stands for “Cost to Company”. It is a commonly used term in employment and jobs. CTC is defined as the total amount of money that the company is going to spend on an employee. It will include salary, bonuses, incentives, provident fund. It is the total amount that an employee can expect from the company in the form of different direct and indirect benefits. While salary is the most basic form of compensation that an employee receives from the company, CTC is made by adding up salary and other components.

How is CTC Calculated?

CTC (Cost to Company) = Gross Salary + Benefits

1. Basic Salary: It is a fixed amount of money on an employment contract that is mutually determined and provided monthly to an employee for their financial needs.

2. House Rent Allowance: Employee is eligible for this if they are living on rent. It is some part of the complete rent of the place where the employee lives.

3. Bonuses: Performance-based bonuses are also provided to employees in some companies.

4. Stock Options: Stock options mean employee gets the option to buy the company’s share at a predetermined price in the future.

5. Employee’s Benefits: Benefits paid to employees like health insurance, life insurance, retirement benefits, and any other perks the company offers.

6. Provident Fund (PF) and Gratuity: Employer contributions to the Employee Provident Fund (EPF) and gratuity, which is payable upon an employee’s retirement, are also part of the CTC.

Example of CTC Calculation

Example:

Suppose an employee has a basic salary of ₹40,000 per month, and receives the following allowances and incentives,

• Dearness Allowance (DA) amounts to ₹4,000
• House Rent Allowance (HRA) is ₹8,000
• Conveyance Allowance is ₹1,000
• Entertainment Allowance is ₹1,000
• Overtime Allowance is ₹1,000
• Medical Reimbursements are ₹1,250

Calculate the required CTC.

Solution:

The employee’s gross salary is calculated as follows:

Gross Salary = Basic Salary + DA + HRA + Conveyance Allowance + Entertainment Allowance + Overtime Allowance + Medical Reimbursements

Gross Salary = ₹40,000 + ₹4,000 +₹8,000 + ₹1,000 + ₹1,000 + ₹1,000 + ₹1,250

Gross Salary = ₹56,250 Per Month.

Now, assuming the employer also provides the following additional benefits to the employee,

• Medical Insurance is ₹2,000 per year.
• The Provident Fund, which is 12% of the Basic Salary (i.e., 12% of ₹40,000 = ₹4,800 per month).
• A Laptop is provided at a one-time expense of ₹50,000.
• The gratuity is ₹2,000 per month.

So, the CTC will be the Sum of All Benefits and Salary

Sum of Benefits + Gross Salary Per Year = ₹2,000 + (₹4,800 x 12 months) + ₹50,000 + (₹2,000 x 12 months) + (₹56,250 x 12 months)

Cost to Company (CTC) = ₹8,08,600.

What does CTC Include?

1. Fixed Compensation: It mainly includes things that are fixed and will be paid consistently, like salary, HRA, etc. Salary is a core component of CTC which is decided at the joining time with mutual agreement between employee and employer. It is taxable, so tax will be deducted from the base salary. This is the most basic form of compensation that an employee receives as a reward for contributing to the company. In general, the employee receives a basic salary every month. In some cases, the employee has to shift for the job, as the workplace is far from his residence, so in those cases employee lives on rent. Rental employees are eligible for this allowance in many companies, in which some part of their total package is provided with salary as house rent allowance. It is a part of CTC and the total amount that the employee receives as HRA will be determined by rental agreement.

2. Variable Compensation: These are not fixed, but employees can get them, like bonuses, and incentives. They work in the way that if the employee performs well during a period, then a bonus amount will be provided to the employee, which will be annually, or quarterly, depending on the company’s policies. It is different from base salary and also a part of CTC. They are provided to boost motivation in employees to contribute to the company’s goals. This is provided because it is observed that for receiving bonuses or incentives, employees perform their work more effectively and give their best for the company.

3. Retirement Benefits: Benefits are provided for financial security to the employees after retirement, like Provident Fund (PF) and Gratuity. A provident fund is an amount that is provided when an employee is retired from a company. It works like a saving scheme in which a small amount from a package of employees is deducted and added to the provident fund. In many years till retirement time, that small amount sums up to the big amount that is provided in retirement, and gratuity is an amount that a company provides for employees for working and contributing to the company for a long period.

4. Employee Benefits and Allowances: Employees are provided with benefits such as health insurance, life insurance, and other perks that enhance an employee’s quality of life and allowances such as travel, education, etc. By receiving health insurance benefits, the employee feels secure and cared for by the company. Health insurance schemes are like if an employee falls ill, then the amount paid for treatment can be paid using health insurance, it may be complete or some part depending on the insurance provider. Also, some companies offer travel allowances for visiting some places during holidays and education allowances so that their employee can learn more skills which will help in the development of the company.

5. Stock Options: The company can also provide stock options to employees. It works in the way that employees could purchase the stocks of the company at a predetermined price which was determined while joining by agreement of employee and company. They are a kind of long-term incentive, the value of shares will increase if the company grows and performs well in the future. They make employees an integral part of the company and they are also a form of compensation. So, it motivates employees to work for the growth of the company. Stock options are included as part of CTC.

Difference between Cost to Company (CTC) and Salary  

Basis	Cost to Company (CTC)	Salary
Definition	It is a total package including both salary and benefits offered by the managing company.	The amount received by the employee as take-home pay.
Components	Includes all monetary and non-monetary components, such as basic salary, allowances, bonuses, benefits, and more.	Typically consists of the basic salary and allowances, which are the taxable components.
Employee’s Perception	Can appear larger, but not all of it is available as take-home pay.	Represents what an employee takes home and can budget with.
Negotiation Tool	Often used as a negotiation tool during job offers and can be higher than the actual salary.	It is for understanding the actual income an employee will receive and managing expenses.
Calculation	Calculated by summing up all the components that make up the total compensation package, often on an annual basis.	It is the actual money provided every month to employees.