Understanding Your Cost to Company: What It Really Means for Your Take-Home Pay

                                             Image by Rupixen from Pixabay

Have you ever heard from any of your friends or experienced yourself that the package shown on offer letter is a higher number and when you receive salary, boom - You're taken aback!

When you receive your offer letter, the figure which is shown on offer letter and usually looked at by the receiver is Cost To Company or Total Package Cost. If you'll simply divide this figure by 12 and consider that number as your monthly take home, then be prepared for some surprises.

For example, if Sandeep received an offer for INR 8,40,000  CTC and if he assumes that he will receive  INR 70,000 per month. Once he joins and receives his salary - his expression will be like

                                            Image by Usman Yousaf from Pixabay

So, what exactly should have Sandeep considered?

First, let us put things in perspective: Cost To Company, is the annual cost incurred by a company to employ Sandeep. Few companies include additional overheads which they incur - for example Insurance, cost of relocation etc., and might show an inflated figure than the take home salary.

Few companies do adopt a policy of, What You See Is What You Get, but, even then there is a catch. More often than not, employers show their part of Provident Fund Contribution and Gratuity which is paid at the time of exit / retirement provided certain conditions are met with respect to tenure. 

So, which components do you need to Exclude from his offer letter, to arrive at approximate monthly take home:

1. Company's contribution to Provident Fund. Employee's contribution to PF comes from their own salary - So an identical contribution as that of Employer will be deducted from your monthly take home. Do note that, if you decide to contribute additional money, to your PF account, often called as 'Voluntary Provident Fund' (VPF) employer is not obliged to match.
2. Gratuity
3. Professional Tax (apx INR 200 per month)
4. Income Tax (depending upon tax bracket)
5. If a company has any welfare fund (an amount of INR 50 to 500 per month might be deducted through payroll)
6. If Medical insurance / Insurance premiums are shown as part of package
7. If Relocation assistance package is shown as part of package
8. If Variable pay is shown as part of package - This is paid on an agreed time frame usually Quarterly / Annually and payout is dependent upon company / employee performance
9. If Transportation benefit is shown as part of package
10. If your company provides for NPS or Superannuation program and you opt for the same
11. Labour Welfare Fund charges - Most states in India charges a nominal sum and this contribution varies by State. This may be deducted Monthly / Quarterly / Annually etc. depending upon the state you work. For example, fund charges for someone working Karnataka are INR 20 per annum for employee
12. Some companies offer Insurance only to Employees. If employee decides to cover their family under insurance plan, they might have to shell out additional cash from their salary
13. Sign-on bonus or Joining Bonus if shown as part of package - please read more information, if its one time amount or monthly amount.
14. If Equity in terms of Restricted Stock Units (RSUs) or Employee Stock Options (ESOPs) are shown as part of Total package - understand that, these are usually converted into shares provided you meet certain conditions

Once you exclude above components, it is safe to assume you can arrive at an approximate value of your monthly take home. This further depends upon certain factors like the Income Tax Regime you choose or if you opt for a company leased car / loan etc.,

Please remember, do not get fooled by the inflationary number that you see on offer letters. Take time to understand about the components. Feel free to ask questions to your Hiring manager / Recruiter/ HR. Most importantly, consider, why do you want to join a particular company? At times, joining a company which offers relatively lesser package might seem a bad deal, but, do understand roles and responsibilities of the job being offered, work culture of the company and opportunities to have great mentors. At the start of your career, those are more valuable than a few extra thousands.

Do share your comments or experiences.

Until later!