You must have come across headlines flaunting salary numbers that could even make a successful entrepreneur feel envious. But, did you know that these eye-popping numbers often hide a harsh reality? This article will break down some pressing questions like: Do companies inflate CTCs? What strategies are used to show higher packages? What components should you focus on, and what should you ignore?
CTC Myth:
We’ve all been taught to aim for high salary packages. But nobody really teaches us how salaries work, and the things we should be looking at to get a higher package — not on paper, but in our bank accounts. So let’s start from the very basics.
You’ve probably seen the term “CTC” thrown around. But what is CTC? If you’re a college student who’s never worked before, understanding this concept can save you from future disappointments. So, CTC stands for Cost to Company — the total amount a company spends to employ you. But here’s where things get murky. When we see a number like Rs 1 crore, we divide it by 12 and assume that’s how much will come to our bank every month. But CTC is not the same as your in-hand salary.
“You may think companies advertise these huge CTCs to impress you and attract top talent, but there’s more to the story. A high CTC is not just for you to feel good about it — it also benefits the company, your college (if you’re fresh out of school), and your family. For the company, high CTCs make them look like attractive paymasters, which helps them hire the best talent. It boosts their reputation. For your parents, it brings bragging rights at social gatherings. And for your college or university, it becomes a powerful promotion strategy to show that they produce the highest-paying employees,” says Anubhav Shah, an HR consultant.
But, in the end, it’s a win-win for everyone except the employee who ends up disappointed when the real paycheck arrives, he adds.
Components of a CTC:
Let’s break down the components of a CTC, which can broadly be split into three categories: fixed components, variable components, and stock components.
- Fixed Components:
Basic Salary: This is the fixed portion that is usually around 50% of your CTC. It’s the amount you get before any tax deductions.
Allowances: These are the extra perks and benefits companies offer, such as House Rent Allowance (HRA), Travel Allowance, Internet Allowance, etc. Some of these come with tax exemptions.
- Variable Components:
The variable portion of your salary can change based on performance. This can include bonuses, commissions, and incentives. However, companies are not legally required to pay the full amount of the variable component. So, even if it’s listed in your offer letter, the actual payout depends on your performance and other factors like company profits.
- Stock Components (ESOPs):
The third component, which many companies use to sweeten the deal, is Employee Stock Ownership Plans (ESOPs). This is when a company offers employees stock options or shares as part of their salary. Now, while ESOPs sound great, they don’t provide immediate financial value.
Role of HRA:
One of the most significant components in your salary is House Rent Allowance (HRA). It’s meant to help you cover accommodation costs and can be up to 50% of your basic salary (depending on where you live).
Reimbursements and Allowances:
Then there are reimbursements—for travel, meals, or phone bills. If you’ve spent money on work-related activities, you can submit bills to get reimbursed. But for Leave Travel Allowance (LTA) and other allowances, certain conditions must be met to receive tax exemptions. For example, LTA only applies if you travel within India, and the mode of transport must be budget-friendly (bus, rail, or economy class flight).
PF and Gratuity:
Both Provident Fund (PF) and Gratuity are retirement benefits and may not affect your monthly paycheck, but they should still be part of your CTC. Provident Fund (PF) requires both the employee and employer to contribute 12% of the basic salary towards a retirement savings plan. While Gratuity is only applicable after five years with the company, it’s a one-time benefit that employees receive when they leave or retire. It’s a long-term investment for your future, but it’s included in your CTC even though you may not see it immediately.
Why Companies Do It:
You may wonder why companies inflate CTCs in the first place. Well, the truth is that a higher CTC benefits not just the employee but also the company and other stakeholders. Companies want to attract top talent and create a reputation as a great employer. The high CTC figures look impressive and boost the company’s profile in the market. It’s a strategic move that helps both parties in the short term but doesn’t always result in higher in-hand salaries for the employee.
How to Decode Your Salary:
So how do you make sure you’re not fooled by big CTC numbers? Here are some tips:
Break down the CTC: Understand the exact components. Is most of it fixed or variable? What percentage is tied to performance?
HRA and allowances: Check what part of your salary is exempt from taxes (e.g., HRA), and make sure you’re submitting all the necessary receipts and proof.
ESOPs: Be cautious with stock options. They sound nice, but they don’t always translate into cash.
Provident Fund: Don’t overlook long-term benefits like PF and gratuity, even though they don’t show up immediately in your bank account.
Conclusion:
The next time you see a salary offer with a headline that boasts of a Rs 1 crore package, remember that it’s not the same as what you’ll be taking home. Focus on the fixed salary, tax exemptions, and performance bonuses—that’s where the real value lies.