23/02/2015 HR SUCCESS TALK: Must to know about designing CTCCost to Company of an employee

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Monday, 1 April 2013

Must to know about designing CTCCost to Company of anemployee

CTC This term is confusing for many people and my post will help them to understand this better.Definition of Cost to Company differ from company to company and every company has its ownstructure and salary components which company wants to make part of CTC. For simpleunderstanding, let me define CTC which includes cost which company incur on employee in form ofstatutory contributions, reimbursement, benefits and sometime administrative costs other thanGross salary of employee.

We will understand all the possible components which company can put in CTC and what is theimpact 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, SpecialAllowances etc

Variable Salary : It includes Performance based incentive, Sale based incentive and Profit basedbonus.

Reimbursements : It includes reimbursement of conveyance, medical, telephone, Books andPeriodicals, Leave Travel Allowance.

Contributions: It includes the benefits offered by the company like Provident Fund, ESI,Superannuation, Gratuity, Statutory Bonus, Medical Insurance, Accident Insurance, Leaveencashment etc.

Stock Options: Stock Options

CTC Cost to Company

Fixed Salary:

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As the name implies it is fixed salary of employee and generally linked with attendance or number ofpayable days of employee. This is major portion of employee in hand salary.

Generally, it is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable. Manystatutory components such as Provident Fund, Bonus and Gratuity etc and other benefits as percompany policy such as Leave Travel Allowance etc. are related with Basic salary hence increaseand decrease in Basic may impact CTC of employee.

Very few private companies use it as salary component. It is mostly given to governmentemployees. In Private companies, in case DA is missing from salary component then considerBasic as Basic + DA. Dearness Allowance is paid to lower the impact of inflation.

HRA is paid to employee to meet expenses against paying rent of a home. Normally companieskeep it 40% to 50% of Basic salary depending upon where you live. In case you stay in metro citiesthen HRA will be kept 50% of Basic salary and in case you stay in non metro cities then HRA willbe 40% of Basic salary. It is due to the fact that HRA is non taxable salary components and itstaxability depends upon where you live.HRA is exempted from taxable income.

Least of 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 (RentPaid – 10% of Basic)

Example : Lets take example of an employee with 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 : 500050% of Basic : 5000Rent paid10% of Basic : 3000 ( 4000 i.e. Rent Paid minus 1000 i.e. 10% ofBasic)

(Minimum of above three is Rs 3000/ hence employee will get tax exemption on Rs 3500 permonth.)

From above example it is evident that HR should keep HRA as 50% (40% in case of non metro) sothat employee 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 HRAwrongly 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 : 2000Rent Paid : 4000

To calculate his HRA tax exemption, let find out all three criteria:

Actual HRA received : 200050% of Basic : 5000Rent paid10% of Basic : 3000 ( 4000Rent Paid minus 100010% 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 is paid to employee against expense to commute between Office to Home.Conveyance allowance is non taxable up to Rs 800/ per month. If an employee gets Rs 1000/ permonth, as conveyance allowance, then Rs 200 per month will be taxable. Hence normally you willfind maximum Rs 800 under Conveyance allowance head. Employee need not to submit any bill forthe same.

Basic :

DA Dearness Allowance:

HRA House Rent Allowance:

Conveyance Allowance:

CCA City Compensatory Allowance :

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A 32 Years old young and dynamicprofessional with Masters inComputer Application and Business

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This is paid to employee to compensate cost of living of a particular city. This is basically a fullytaxable component. In standard form, CCA vary from city to city and grade to grade. CCA dependsupon company policy.

Example : Below is an example of CCA for Delhi and Jaipur for Grade 1 and 2.

Location Grade CCADelhi Grade 1 3000Delhi Grade 2 2500Jaipur Grade 1 2000Jaipur Grade 2 1500

Whenever an employee gets transferred from one location to another CCA also gets changedaccordingly. This is also as per company policy.

This allowance component is mainly used to adjust rest of the amount which is to be given to anemployee. For example, company wants to give Rs 20000 as gross to an employee and companyhas allocated Rs 18000 as Basic, HRA, Conveyance allowance and CCA then Rs 2000 will be putunder Special allowance. It is fully taxable allowance.

Company as per company policy can also make some other allowances which can be paid toemployees. For example Uniform washing allowance, Attendance allowance etc. All thesecomponents are taxable.

As the name implies variable salary is not fixed and depends upon performance of an employee.Now a days, many companies are keeping this as part of their employee CTC. Earlier, onlyemployees related to sales or profit making department use to have variable component in theirsalary but now even employee related support functions like HR, admin, QA, Training etc also havevariable components in their salary. Companies are not willing to pay more fixed but open to payhigher variable pay as variable is related to sale and profitability of organization and company has noproblem in paying money to employees if company is making profit. This is the reason that fixedsalary is decreasing and variable pay percentage is increasing day by day. Even some of thecompanies make Fixed and Variable pay as 5050 for sale profile.

Performance based incentive, if made part of CTC, normally known as variable pay. Every companyhas different policy to give performance based incentive or variable pay. Some companies mayconsider your monthly performance rating to give this variable amount. Please refer link “How toBuild mature performance managementsystem without any automation software?” to knowmore about performance rating system.

Example: Below is one of the sample sheet which shows variable pay % given to an employeebasis 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 recruitmentexecutive achieves some key deliverable. One of the example as below:

If 100% positions are closed within 30 days TAT : 150% of variable payIf 90% positions are closed within 30 days TAT : 100% of variable payIf 80% positions are closed within 30 days TAT : 70% of variable pay andso on

Sale based incentive is normally over and above CTC but some company makes it part of CTC. Inany case, sales based incentive is given to employees who are in sales profile.

Special Allowance:

Any other type of allowance:

Variable Salary:

Performance Based Incentive:

Sale Based Incentive:

Insuran...

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In most of cases it is paid annually. Company link “profit linked bonus” with profitability of companyor project or department. This also works as retention tool and motivates employee to ensure higherprofitability at the same time.

Design of performance incentive scheme is very important and many factors should be kept in mindwhile framing one. Policy maker should give due importance to historical data, person’s capability,product and service sale ability market trend etc so that incentive plan framed should not look unrealistic otherwise employee will feel that he will never be able to achieve variable pay which ismade part of his CTC and in this case performance based incentive will loose its positives.

Reimbursement is paid to employee against some expenses and employee need to submit bills forthe same. Every reimbursement should be seen differently in context of tax.

Medical reimbursement is paid to employee to meet expenses on medical. It is non taxable up to15000 per annum. It is up to company whether company wants to pay it monthly, quarterly, halfyearly or annually. Amount paid above 15000 in a year will become taxable. Employee need tosubmit medical bills in support of medical expenses. In absence of medical bills it will becometaxable income. Employee can submit bills of medical expenses made on spouse, child anddependent parents.

Many things related to medical reimbursement payout depend upon company policy. For example,whether employee can start claiming medical reimbursement from first month or after completion ofcertain period of time, whether employee will get medical reimbursement in case of non submissionof medical bill even if it is taxable, whether medical reimbursement is linked with employeeattendance by any way etc.

Leave Travel Allowance is also known as Leave Travel Concession (LTC) which is paid for travelcost incurred by employee in travel. Every company has its own rule to decide on amount of LTA tobe given to an employee. A company may prefer to keep it equal to monthly basic salary ofemployee or make it fixed depending upon grade and native place of employee. There is no, assuch, guidelines from government on LTA amount. It can be any amount which employer wants tokeep as LTA.

It is a non taxable income but there are some rules which should be kept in mind while takingbenefit of LTA for tax.

Employee need to take leave especially Privilege leave.Only travel cost will be reimbursed which includes travel cost of spouse, child anddepended parents.Only amount paid against travel cost will be non taxable. For example if my LTAeligibility is Rs 10000/ and employee spends Rs 5000 in travel and submits bills ofsame then only Rs 5000/ will be non taxable. Rest Rs 5000/ will be taxable income.LTA is exempted for two journeys in a block of four years. Current block is 20102013and next block will be 20142017.

Journey should be made through shortest path between two destinations.

Refer the post How to design Leave Travel Assistance LTA policy of your company?

It is provided to employee for expense incurred on professional training. It is non taxable up to Rs14000/ per annum and employee needs to provide bills of same.

Mobile reimbursement is paid to employee against expense incurred for use of mobile / telephone forofficial purpose. Employee need to submit bill for same. Employer can fix an amount for suchreimbursement. Such amount should be logical and linked with employee's profile

This is paid to employee to reimburse expense made on purchase of Books and periodicals. It isnon taxable if bills are submitted.

It is exempted from tax up to Rs 100 per month per child for two children.

Profit linked Bonus:

Reimbursement:

Medical Reimbursement:

LTA Leave Travel Allowance:

Training Reimbursement:

Mobile/ Telephone Reimbursement:

Books and Periodicals:

Children Education Allowance:

Children Hostel Allowance:

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It is paid to meet expenses for Children hostel allowance. It is exempted from tax up to Rs 300 permonth per child for two children.

Food coupons or Meal Pass

It is given to employee to get meal during working hours. Rs 50/ per meal is tax free. Please readmy blog post 5facts regarding Food coupons / meal pass and its tax implications to knowmore.

Contribution means contribution made by employer for employee’s long term saving schemes orsocial benefits scheme as per statutory compliance.

It is contribution made by employer (12% of Basic salary) against EPF. It is statutory obligation atthe part of employer. Employee gets benefit of PF deduction (12% of basic) at his part underSection 80C of income tax. There are many other facts related to Provident fund.

To know visit following two posts:

PF Fundamentals everyone should know!!17 interesting Facts about PF (Provident Fund) act in India!!

Employer also keeps PF Admin (1.61% of Basic) as part of CTC which employer needs to pay toRPFC other than 12% of Basic salary.

Employer need to deposit 4.75% of gross salary of employee in case employee’s gross salary isless 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 bythat amount. There is no tax benefit associated with ESI contribution or deduction.

Gratuity is paid to employee once employee completes 5 years of continuous services or in case ofemployee death irrespective of completion of 5 years. It is statutory liability of employer hence manyemployers keep it in employee CTC. It is one of the most debated topics whether employer shouldkeep gratuity amount as part of CTC or not? You can refer my post which can help you get manyother questions related to gratuity i.e. 13 facts one should know about Gratuity!!

Employee gets 15 days salary for number of years completed as gratuity. Hence gratuity taken inCTC is @ 4.81% of Basic.

Gratuity paid to employee is exempted from tax. Least of following is exempted.

Actual gratuity amount paid15 days salary for each year of completion or 4.81% of Basic multiplied with number ofmonths completed.Rs 10 Lacs

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% ofBasic capped at Rs 3500/. Employer keeps it as part of CTC.

Employer takes medical and accidental insurance for employee welfare hence employer keeppremium paid against such insurances in employee CTC. Learn How to reduce medical insurancepremium cost by controlling claim ratio.

Now a days, many companies provide stock options to employees. This option is mainly given totop management employees. This helps company to keep their employee engaged towardscompany growth. It is beneficial for employee in case company is growing. Their stock value canincrease in that case.

Contributions:

Employee Provident Fund:

ESIC (Employee State Insurance Corporation)

Gratuity:

Statutory Bonus:

Group Medical Insurance and Accident Insurance:

Stock Options:

Conclusion:

23/02/2015 HR SUCCESS TALK: Must to know about designing CTCCost to Company of an employee

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Posted by Govind Negi at 05:34

Labels: Compensation and Taxation, HR Discussions

If you know about these components and how these components will impact you as person or youremployees as HR then you will be able to make your compensation package in such a way thatsuits to employee’s need.

For example,

If an employee whose CTC is less and do not fall in tax range then HR can structure theCTC in such a way that gives more in hand to employee.If an employee whose CTC is higher and falls under tax range then HR need to preparebest possible tax friendly structure so that employee can get maximum in hand at end offinancial year.

Current Tax slabs are as below:

India Income tax slabs 20142015 for General tax payers and Women

Income tax Slab (In Rs) in a FY Tax0 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 20142015 for Senior Citizen ( 60 to 79 years) tax payers and Women

Income tax Slab (In Rs) in a FY Tax0 to 3,00,000/ Zero

3,00,001/ to 5,00,000/ 10%5,00,001 to 10,00,000/ 20%Above 10,00,000/ 30%

India Income tax slabs 20142015 for Very Senior Citizen (Aged 80 and above) tax payers andWomen

Income tax Slab (In Rs) in a FY Tax0 to 5,00,000/ Zero

5,00,001 to 10,00,000/ 20%Above 10,00,000/ 30%

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139 comments:Raj Kumar said...

Hi Sir,

Excellent insight material.

Regards

Rajkumar.T

1 April 2013 at 21:59

Govind Negi said...

Dear Raj,

Thanks for your appreciation.

2 April 2013 at 00:49