HOW TO DESIGN YOUR EMPLOYEE CTC (Cost to Company)? CTC -Cost to Company CTC- This term is confusing for many people and my post will help them to understand this better. Definition of Cost to Company differs from company to company and every company has its own structure and salary components which company wants to make part of CTC. For simple understanding, let me define CTC which includes cost which company incur on the employee in the form of statutory contributions, reimbursement, benefits and sometime administrative costs other than Gross salary of the employee. We will understand all the possible components which company can put in CTC and what is the impact of these components on your in hand and tax liability. CTC includes various components like: Fixed Salary: It includes Basic, DA, HRA, Conveyance, City compensatory Allowance, Special Allowances etc. Variable Salary: It includes Performance based incentive, Sale based incentive and Profit based bonus. Reimbursements: It includes reimbursement of conveyance, medical, telephone, Books and Periodicals, Leave Travel Allowance. Contributions: It includes the benefits offered by the company like Provident Fund, ESI, Superannuation, Gratuity, Statutory Bonus, Medical Insurance, Accident Insurance, Leave encashment etc. Stock Options: Stock Options Fixed Salary: As the name implies it is fixed salary of employees and generally linked to attendance or a number of payable days of employment. This is a major portion of employee in hand salary. Basic: Generally, it is 40% to 50% of CTC (Cost to Company). The basic salary is fully taxable. Many statutory components such as Provident Fund, Bonus and Gratuity etc and other benefits as per company policy such as Leave Travel Allowance etc. relate to Basic salary hence increase and decrease in Basic may impact CTC of the employee. DA- Dearness Allowance: Very few private companies use it as salary component. It is mostly given to government employees. In Private companies, in case DA is missing from salary component then consider Basic as Basic + DA. Dearness Allowance is paid to lower the impact of inflation. HRA- House Rent Allowance: HRA is paid to employees to meet expenses against paying rent on a home. Normally companies keep it 40% to 50% of Basic salary depending upon where you live. In case you stay in metro cities then HRA will be kept 50% of Basic salary and in case you stay in non metro cities then HRA will be 40% of Basic salary. It is due to the fact that HRA is not taxable salary components and its taxability depends upon where you live. HRA is exempted from taxable income. Least of the following is exempted: Actual HRA received 50% of salary (basic + DA) if residing in a metropolitan city, or else 40% The amount by which rent exceeds 1/10th of salary (basic + DA). In simple words (Rent Paid – 10% of Basic) Example: Let’s take the example of an employee with the following figures. Basic salary : 10,000/- per month lives in Delhi (Metro city) HRA : 5000 (50% of Basic) Rent Paid : 4000 To calculate his HRA tax exemption, let find out all three criteria: Actual HRA received : 5000 50% of Basic : 5000 Rent paid-10% of Basic : 3000 (4000 i.e. Rent Paid minus 1000 i.e. 10% of Basic) (Minimum of above three is Rs 3000/- hence employee will get tax exemption on Rs 3500 per month.) From above example it is evident that HR should keep HRA as 50% (40% in the case of non metro) so that employees can get maximum benefit of HRA for tax exemption. Let’s understand what I am trying to say here. For example if HR structures above employee HRA wrongly and keep it Rs 2000/- which means new structure will look like as below: Basic salary : 10,000/- per month lives in Delhi (Metro city) HRA : 2000 Rent Paid : 4000 To calculate his HRA tax exemption, let find out all three criteria: Actual HRA received : 2000 50% of Basic : 5000 Rent paid-10% of Basic : 3000 (4000-Rent Paid minus 1000-10% of Basic) Minimum of above three is Rs 2000/- hence employee will get tax exemption on Rs 2000 per month. Hence it is clear that this is not a tax friendly salary structure. Conveyance Allowance: Conveyance allowance is paid to employee against expense to commute between Offices to Home. Conveyance allowance is not taxable up to Rs 800/- per month. If an employee gets Rs 1000/- per month, as conveyance allowance, then Rs 200 per month will be taxable. Hence normally you will find maximum Rs 800 under Conveyance allowance head. An employee need not submit any bill for the same. CCA- City Compensatory Allowance : This is paid to employees to compensate the cost of living of in a particular city. This is basically a fully taxable component. In standard form, CCA vary from city to city and grade to grade. CCA depends upon company policy. Example: Below is an example of CCA for Delhi and Jaipur for Grade 1 and 2. Location Grade CCA Delhi Grade 1 3000 Delhi Grade 2 2500 Jaipur Grade 1 2000 Jaipur Grade 2 1500 Whenever an employee gets transferred from one location to another CCA also gets changed accordingly. This is also as per company policy. Special Allowance: This allowance component is mainly used to adjust the rest of the amount which is to be given to an employee. For example, the company wants to give Rs 20000 as gross to an employee and the company has allocated Rs 18000 as Basic, HRA, Conveyance allowance and CCA then Rs 2000 will be put under Special allowance. It is a fully taxable allowance. Any other type of allowance: Company as per company policy can also make some other allowances which can be paid to employees. For example Uniform washing allowance, Attendance allowance etc. All these components are taxable. Variable Salary: As the name implies variable salary is not fixed and depends upon the performance of an employee. Now days, many companies are keeping this as part of their employee CTC. Earlier, only employees related to sales or profit making department use to have a variable component in their salary but now even employee related support functions like HR, admin, QA, Training etc. also have variable components in their salary. Companies are not willing to pay more fixed but open to pay higher variable pay as variable relates to sales and profitability of the organization and the company has no problem in paying money to employees if the company is making profit. This is the reason that the fixed salary is decreasing and variable pay percentage is increasing day by day. Even some of the companies make Fixed and Variable pay as 50-50 for sale profile. Performance Based Incentive: Performance based incentive, if made part of CTC, normally known as variable pay. Every company has different policies to give performance based incentive or variable pay. Some companies may consider your monthly performance rating to give this variable amount. Example: Below is one of the sample sheets which shows variable pay % given to an employee basis his rating. Rating Variable pay % 5 150% 4 125% 3 100% 2 70% 1 0% Some companies link it with major key deliverable of an employee. Example: In case of a Recruitment Executive profile, variable pay can be paid if recruitment executive achieves some key deliverable. One of the examples as below: If 100% positions are closed within 30 days TAT : 150% of variable pay If 90% positions are closed within 30 days TAT : 100% of variable pay If 80% positions are closed within 30 days TAT : 70% of variable pay and so on Sale Based Incentive: Sale based incentive is normally over and above CTC but some company makes it part of CTC. In any case, sales based incentive is given to employees who are in sales profile. Profit linked Bonus: In most of the cases it is paid annually. Company link “profit linked bonus” with the profitability of a company or project or department. This also works as a retention tool and motivates employee to ensure higher profitability at the same time. The design of performance incentive scheme is very important and many factors should be kept in mind while framing one. A policy maker should give due importance to historical data, person’s capability, product and service sales ability market trend etc. So that incentive plan framed should not look unrealistic otherwise the employee will feel that he will never be able to achieve variable pay which is made part of his CTC and in this case performance based incentive will lose its positives. Reimbursement: Reimbursement is paid to employee against some expenses and employee need to submit bills for the same. Every reimbursement should be seen differently in the context of tax. Medical Reimbursement: Medical reimbursement is paid to employees to meet expenses on medical. It is not taxable up to 15000 per annum. It is up to company whether the company wants to pay it monthly, quarterly, half yearly or annually. Amount paid above 15000 in a year will become taxable. An employee needs to submit medical bills in support of medical expenses. In absence of medical bills it will become taxable income. The employee can submit bills of medical expenses made on spouse, child and dependent parents. Many things related to medical reimbursement payout depend upon company policy. For example, whether an employee can start claiming medical reimbursement from the first month or after completion of a certain period of time, whether employees will get medical reimbursement in case of non submission of medical bill even if it is taxable, whether medical reimbursement is linked with employee attendance by any way etc. LTA - Leave Travel Allowance: Leave Travel Allowance is also known as Leave Travel Concession (LTC) which is paid for travel cost incurred by the employee in travel. Every company has its own rule to decide on the amount of LTA to be given to an employee. A company may prefer to keep it equal to the monthly basic salary of an employee or make it fixed depending upon the grade and native place of employment. There is no, as such, guidelines from government on LTA amount. It can be any amount which employer wants to keep as LTA. It is a non taxable income but there are some rules which should be kept in mind while taking benefit of LTA for tax. An employee need to take leave especially Privilege leave. Only travel cost will be reimbursed which includes travel cost of spouse, child and depended parents. Only amount paid against travel cost will be not taxable. For example if my LTA eligibility is Rs 10000/- and employee spends Rs 5000 in travel and submits bills of the same then only Rs 5000/- will be not taxable. Rest Rs 5000/- will be taxable income. LTA is exempted for two journeys in a block of four years. Current block is 2010-2013 and next block will be 2014-2017. Journey should be made through the shortest path between two destinations. Training Reimbursement: It is provided to an employee for expense incurred on professional training. It is not taxable up to Rs 14000/- per annum and employee needs to provide bills of the same. Mobile/ Telephone Reimbursement: Mobile reimbursement is paid to employee against expense incurred for use of mobile / telephone for official purpose. An employee needs to submit bills for the same. It is not taxable up to Rs 12000 per annum. Books and Periodicals: This is paid to employee to reimburse the expense made on purchase of Books and periodicals. It is not taxable if bills are submitted. Children Education Allowance: It is exempted from tax up to Rs 100 per month per child for two children. Children Hostel Allowance: It is paid to meet expenses for Children hostel allowance. It is exempted from tax up to Rs 300 per month per child for two children. Contributions: Contribution means a contribution made by the employer for employee’s long term saving schemes or social benefits scheme as per statutory compliance. Employee Provident Fund: It is the contribution made by the employer (12% of Basic salary) against EPF. It is a statutory obligation on the part of employers. The employee gets the benefit of PF deduction (12% of basic) at his part under Section 80C of income tax. The employer also keeps PF Admin (1.61% of Basic) as part of CTC which employer needs to pay to RPFC other than 12% of Basic salary. In total the employer contribution is 13.61% of Basic and is bifurcated in the following manner: PF Account : 3.67% Pension Head : 8.33% or 541.45 which one is lesser. ELDI (Employee Linked Insurance) : 1.10% Administrative charge (PF + ELDI) : 0.51% ESIC (Employee State Insurance Corporation) Employers need to deposit 4.75% of gross salary of employees in case employee’s gross salary is less than 15000. Hence employer keeps it as part of Employee CTC. 1.75% of gross get deducted from employee’s Gross salary which decreases his in hand salary by that amount. There is no tax benefit associated with ESI contribution or deduction. Gratuity: Gratuity is paid to an employee once the employee completes 5 years of continuous services or in case of employee death irrespective of completion of 5 years. It is a statutory liability of employer hence many employers keep it in employee CTC. It is one of the most debated topics as whether employers should keep the gratuity amount as part of the CTC or not? The employee gets 15 days salary for the number of years completed as gratuity. Hence gratuity taken in CTC is @ 4.81% of the basic. Gratuity paid to the employee is exempted from tax. Least of the following is exempted. Actual gratuity amount paid 15 days salary for each year of completion or 4.81% of Basic multiplied with the number of months completed. Rs 10 Lacs Statutory Bonus: It is statutory bonus which is paid to employees whose basic is less than or equal to Rs 10000/-. Minimum bonus payable is 8.33% of basic capped at Rs 3500/- i.e. Rs 292/- and maximum 20% of Basic capped at Rs 3500/-. The employer keeps it as part of the CTC. Group Medical Insurance and Accident Insurance: The employer takes medical and accidental insurance for employee welfare hence employer keep premium paid against such insurances in employee CTC. Stock Options: Now days, many companies provide stock options to employees. This option is mainly given to top management employees. This helps companies to keep their employee engaged towards company growth. It is beneficial for employee in case company is growing. Their stock value can increase in that case. Conclusion: If you know about these components and how these components will impact you as a person or your employees as HR then you will be able to make your compensation package in such a way that suits to employee’s need. For example, If an employee whose CTC is less and do not fall in tax range than HR can structure the CTC in such a way that gives more in hand to employee. If an employee whose CTC is higher and falls below tax range than HR need to prepare the best possible tax friendly structure so that employees can get the maximum in hand at the end of the financial year. Current Tax slabs are as below: India Income tax slabs 2013-2014 for General tax payers and Women Income tax Slab (In Rs) in a FY Tax 0 to 2,00,000/- Zero 2,00,001/- to 5,00,000/- 10% 5,00,001 to 10,00,000/- 20% Above 10,00,000/- 30% India Income tax slabs 2013-2014 for Senior Citizen ( 60 to 79 years) tax payers and Women Income tax Slab (In Rs) in a FY Tax 0 to 2,50,000/- Zero 2,50,001/- to 5,00,000/- 10% 5,00,001 to 10,00,000/- 20% Above 10,00,000/- 30% India Income tax slabs 2013-2014 for Very Senior Citizen (Aged 80 and above) tax payers and Women Income tax Slab (In Rs) in a FY Tax 0 to 5,00,000/- Zero 5,00,001 to 10,00,000/- 20% Above 10,00,000/- 30%
Posted on: Fri, 04 Oct 2013 06:02:19 +0000
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