It is not necessary that employed people understand the complicated and confusing financial terminology related to their salaries. While salary is a form of periodic payment from an employer to an employee, net salary, gross salary and cost to company (CTC) are various payroll jargon that must be understood clearly. Let us try to understand these payroll terms in a simpler way.
Before we get to the technical aspects of the salary, let us understand the conditions under which a person is eligible for a salary from his employer. An individual who works part-time or full-time for a company or an individual under a contract of employment, whether oral or written, express or implied, is referred to as an employee.
The person or the company, an individual works for is called employer and the money that he gets from the employer is known as Salary, Income or Wage. An employee’s salary may be specified in an employment contract, whether written or oral, and paid on a defined, regular period basis. On the other hand, piece wages, are paid on the basis of each job, hour or some other unit and are paid separately, rather than on a periodic basis.
However, in case a person has been hired by an organization on contract basis or works as a freelancer in some company, he cannot be said to earn a salary from his job. In this case, his income is classified as “income from business and profession”.
We shall explain various terms related to a salary so that the employees are able to figure out their in-hand salary and not be let down on their CTC/year expectations. Let us first understand the different types of salary:
What is CTC or Cost to Company?: The term should never be confused with the total in-hand annual salary of an employee. CTC or Cost to Company is a term that companies use to calculate the total cost to employ a person. It includes all the costs associated with an employment contract and comprises of all compulsory deductibles including deductions for provident fund, medical insurance etc.
It should be clearly understood that while these deductibles form a part of your compensation structure, you do not get them as a part of in-hand salary. In other words, deductibles increase your CTC but do not contribute to your net salary.
Let us now understand different components of a salary in detail. The “salary” must ideally consist of the following parts:
It is interesting to note that perquisites cannot be taxed directly because these are non-cash components. According to the income tax laws, a certain value is assigned to each of these components so that a tax can be imposed on them. As a thumb rule, only those benefits that you use for personal purpose are considered as perquisites.
It should be noted that there are two aspects of Provident Fund Contribution. Apart from the employee’s contribution, an employer also contributes to his provident fund. This is usually 12 percent of the basic salary and is directly deposited in an employee’s Provident Fund (PF) account. This contribution is only paid out to an employee when he retires or resigns. However, the employee’s contribution to PF is deducted from his monthly salary and deposited in his PF account. This amount can also be reimbursed in cases of need.
So we see that the Cost to the company is the sum of Gross salary and the Benefits that an employee receives from the employer in the form of medical insurance, provident fund, laptop and so on. However, the net salary is only calculated after deductions for taxes and recovery for loans have been made.
The applicable taxes are calculated depending upon the taxation policies of the government and some policies that may differ for each organization.
This article to explain the terminology of payroll is a part of Brio’s endeavor to create awareness and dispel ambiguity among the working professionals regarding their understanding of salary and the different components of the salary slip.