InvestorQ : I am a fresher and I am planning to apply for a job in an MNC. What are the basics of a salary I must be aware of?
Neha Samdani made post

I am a fresher and I am planning to apply for a job in an MNC. What are the basics of a salary I must be aware of?

Answer
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Pratik vyas answered.
1 year ago


Heartiest congratulations on moving on to one of the most important phases of your life.

It is good that you are taking keen interest in your salary and are trying to understand it better. This will not only help you negotiate a good deal right now, but it will help you when you make career switches in the years to come as well.

Here’s the lowdown on some of the most commonly-used terms when discussing one’s salary:

CTC

CTC or cost to company is the total amount that a company spends on an employee and hence, is the total package at which the company hires the employee. CTC is not your take-home salary. Instead CTC is made up of various other components such as basic pay, various allowances, reimbursements, gratuity, variable pay, etc.

Thus, CTC is not the amount you get to take home. It is the total of one’s gross salary, provident fund and gratuity.

Fixed salary

Fixed salary is one of the major contributors of your CTC breakup as well as a major share of your monthly take-home salary. As the name suggests, this is the amount that is fixed and will not change until there is a salary revision. It consists of Basic Salary, DA, travel allowance, House Rent Allowance (HRA), etc.

Basic salary

Basic salary is an individual’s base income and is the fixed part of one’s salary package as offered by the company. Basic salary varies depending on an employee’s seniority and industry he/she works in. Basic salary is usually 40-50% of an employee’s CTC.

Gross salary

This is the amount of your salary you earn before taxes or other deductions are made. This includes bonus, over-time pays, holiday pay, etc.

Gross Salary = Basic Salary + HRA + Other Allowances

Net salary

Net salary, or take-home salary as it is commonly referred to, is the amount that remains after deducting income tax at source (TDS) and other deductions such as employer’s contribution to provident fund, professional tax, etc.

Net Salary = Basic Salary + HRA + Allowances - Income Tax - Employer's Provident Fund - Professional Tax

Allowances

An allowance is an amount received by the employee, over and above the regular salary, for meeting service requirements. Allowances are provided in addition to the basic salary, are taxable and vary from company to company. Not all companies are expected to provide all allowances. A few common types of allowances are:

House Rent Allowance (HRA): It is an amount paid to employees by companies for expenses related to rented accommodation.

Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover an employee’s domestic travel expenses. Please note, there are terms and conditions that the employee’s travel duration should meet in order to avail of LTA. Furthermore, LTA doesn’t include expenses for food, accommodation, etc. during the travel.

Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.

Dearness Allowance: Dearness Allowance (DA) is a cost of living allowance that is aimed at hedging the ever-increasing inflation. Because DA is directly related to the cost of living, its value varies for different employees based on their location of employment.

Thus, DA can’t be the same for two people working in different cities. Hence, DA is different for employees in the urban sector, semi-urban sector or the rural sector.

Reimbursements: Companies also offer various reimbursements to their employees. A few commonly given reimbursements are medical treatments, phone bills, newspaper bills, etc. This reimbursement amount doesn’t come directly into one’s salary, but needs to be claimed by providing bills.

Employer Provident fund/EPF or Provident Fund: All employees in India, who work in companies with over 20 employees, get an involuntary Provident Fund account opened in their names.

Every employee contributes 12% of his/her salary towards the EPF, while an employer pays another 12%, out of which 8.33% is invested in the Employee's Pension Scheme (EPS) while the balance 3.67% is invested in EPF.

This provident fund is an investment that both employee and employer make and the lump sum amount acts as the employee’s retirement corpus.

Gratuity: Gratuity is a part of the salary that is received by an employee from the employer for the services offered by the employee when he/she leaves the job.

Though an employee can receive the gratuity amount only after five years, it will be deducted by the employer every year and hence it will get deducted from your CTC.