What is Cost to the Company?

In this article we will try to explain what is Cost to the Company, net salary and gross salary which are some of the key components that form part of any individual’s salary structure.   Cost to the company is the figure what companies generally like or prefer to quote when they offer salary packages to potential job aspirants.   The cost to the company figures can be quite misleading for new job aspirants while seasoned or experienced individuals usually are quite obviously aware of the differences after a couple of bitter experiences.    At the end of it, the amount the person actually gets in hand can turn out to be significantly lower than what he/she would have originally imagined.

Cost to Company- Gross Salary – Net Salary – The Three Main Components of Your Salary

CTC, Net and Gross salary are the three key components of your salary which you need to understand before you accept your offer letter.  Let’s take a live example to understand this better.   Arjun Malhotra recently got selected as an Assistant Manager in one of the leading Mumbai-based BPOs.   It was his first job and he was offered an annual CTC package of Rs. 501624/-   ‘ Wow that sounds cool’ he thought.   He immediately did some rough calculations and estimated that his monthly salary would turn out to be Rs. 41,802/-.    His happiness didn’t last long when he was provided the offer letter and then it dawned on him what a cost to the company or CTC package meant.

Basically a CTC package includes all of the cost factors (well almost) that a company spends on an individual.  This primarily includes Employer’s contribution of provident funds, Gratuity, Mediclaim Insurance, Food Coupons, Loyalty bonus, and performance linked bonuses to name a few.   When companies include all these factors naturally the salary has to look bloated.

From an employee’s perspective the inclusion of the aforementioned factors doesn’t reflect directly in his net salary or his take home salary.    Net salary or take home salary basically means what you get in hand post the standard deductions such as PF, gratuity, and professional tax if applicable, etc.   The other major factor that impacts your net salary other than the standard deductions is the income tax.

Now that we have explained you what a CTC and net salary means, let us try and explain you the meaning of “gross salary.”  Gross salary is basically the salary that is quoted on your pay slip.   Gross salary doesn’t include the additional components that form part of your CTC.

Now lets go back to Arjun’s example.   Below is an extract from Arjun’s offer letter.

Gross and CTC Salary Breakup

ComponentsAmount Per MonthComponentsAmount Per Month
Basic13200Employer's PF1797
HRA7260Gratuity635
Transportation800Fixed Bonus5500
Education200Mediclaim250
Meal Coupons1100Canteen620
LTA990
Medical1250
CCA8200
Total Gross33000Total CTC41802
Annual CTC5010624

The above table has been divided into two segments.  The components on the left are the ones that are accounted for in his gross salary while the components on the right are the CTC components which don’t directly reflect in his take home pay.  Most of these components such as performance bonus, gratuity, employer’s contribution of PF and canteen facilities do not get accounted for in his monthly take home but benefits he can derive in the long run.    So if we all want to know what Arjun’s actual salary is – well it turns out to be just Rs. 33,000/- (Gross salary) which is approximately Rs. 8000/- less than his CTC.  Once again there are also some additional components included in Arjun’s gross salary such as LTA that would be paid out to him at the end of the year or the food coupons (Sodhexo meal passes) paid monthly but in the form of coupons.  This again differs or varies from company to company.  Most companies offer Sodhexo’s as a tax saving gesture where the employees get to save a certain amount annually on income tax as the deducted amount is not taken into consideration for calculating income tax.

Other than what you get to see in Arjun’s offer letter, different companies have a variety of components that are  considered under CTC.  For instance most leading banks provide home loans to their employees on a heavily discounted rate of interest.   The entire benefit the employees gain from the discounted rate is added to their CTC package which hugely inflates their overall package.

What Prospective Job Applicants Should Watch Out For?

So before you end up signing on the dotted line or get into negotiation mode it is very important to understand from your prospective employer about their existing pay structure.   We believe you need to clarify the following before you opt in for the job.

  • Understand what all components the cost to the company package includes.
  • What would be your gross salary?
  • How much can you expect as your take home?
  • Compare the components offered with your existing salary to understand the actual increase in salary.
  • Bonus if any – is it included in the CTC or over and above it?

We hope this article helped you in understanding what is the cost to company, gross salary and net salary component  of your salary.   Understanding these factors clearly before signing on the dotted line goes a long way in avoiding unpleasant surprises down the line.  Feel free to drop in your comments or share your experiences.

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About Sibi Uralath

Sibi Uralath is a content manager, blogger and writer by profession [not the kind who writes novels, books or poems]. When he's not working, he's usually biking away to glory. Connect with him on Twitter

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