As a broad thumb rule, what you get in hand will be 70% of your CTC. So if your annual CTC is Rs 5 lakh, you can expect to get an annual take home of 3.5 lakh or Rs 29000 per month.
So what happens to the difference? There are many components that are offered in addition to the CTC, ESOPs being a good case in point. So what are the things you need to look at there?
1. Certain components of CTC may not be cash components
A company may beef-up your CTC with components that don’t really translate into month-end cash or that may have just a notional components. Some examples include:
-Value of perquisites is included in CTC. So if you are provided with a company accommodation, car, driver, child education expenses and so on, the value of these get included in the CTC.
-Banks may include interest subsidies in CTC. That is, if you are a bank employee, you are entitled to a discounted rate on loans. The difference between the market rate and the discounted rate maybe considered part of your CTC. Even corporate give out loans and advances at subsidized interest rates and the subsidy would be added to the CTC.
-Companies may include the cost of group medical or life insurance. Some companies may add food subsidies, that is, you may be getting a subsidy on your lunch in the office canteen. If you carry your lunch from home, you may not actually benefit from this component. Similarly, if the company provides transport, there maybe transport costs or subsidies.
-Companies include gratuity in the CTC. Gratuity is a sort of bonus that is paid out when you resign or retire from your company. The catch: You are entitled to gratuity only after completing 5 years in the company.
-Employer’s contribution to your provident fund is included in CTC. This amount is deposited by the employer in your provident fund and so this does not form part of your take-home. You will get this amount only at the time you resign or retire.
2. Deductions further reduce monthly take home
Even after you have arrived at the cash value of your take home, there are certain deductions made from it. Tax is one such deduction. It is nothing but the taxes withheld from your income by the company. It is the equivalent of ‘withholding tax’ that several countries have. How much tax is deducted depends on the various components of your salary.
In addition to income tax deduction, you will find a professional tax deduction being made every month.
A lot of companies may allow you to choose the components in your salary. For instance, they may allocate a certain amount as a ‘flexi pay’ component. Within this amount, you maybe able to choose components such as HRA, medical reimbursement, etc depending on what maybe most tax efficient for you. If you are in a higher income bracket, it would be wise to consult a professional to help you optimize your salary to make it tax effective.
The other deduction is your contribution to provident fund. This amount is deducted from your monthly salary and deposited in the provident fund. This is your contribution and comes out of your monthly salary, thus reducing your take-home. Again, a lot of companies make this deduction optional. However, making provident fund contributions maybe a wise saving tool. Currently company provident funds earn tax free returns of 8.5% per annum. Over a long period of time, that would build up to a decent corpus.
3. Annualised and variable components
There are certain components that are paid out to you annually or subject to your performance; these do not become part of your monthly take home. Examples include leave travel allowance, annual bonus etc.
Variable salaries can range between 15-50%. For programmers the variable pay would be around 15% of the CTC while for marketing professionals it could go up to 50%. Before the 2008 crisis, most companies paid out the variable components in full, but that has changed now. There are various factors that come into play while arriving at the variable pay outs. The company’s performance as well as your individual performance would both matter.
4. Understand what your ESOP
Employee Stock Option Plans or ESOPs are given out over and above the CTC. The company gives employees an option to purchase stocks at a certain future date at a discounted price. As the value of the company scrip increases, the employee stands to earn capital gains. “When a company offers ESOPs, the CTC part of the compensation maybe a little lower.
While ESOPs might seem attractive when the company HR presents the numbers to you, it is important to look into the fine print. There are a number of issues here. Firstly, people do not realize that there is a certain vesting period for ESOPs. That is, you will be eligible to exercise the ESOP only after working in the company for a certain period, say 2 years or so. The second issue is the strike price. This is the price at which the ESOP is granted. If the market price at the time of exercising the ESOP is lower than the strike price, there is really no gain. And that has happened many times in the past.
So is there room for negotiation? There is always a 10% room for negotiation in any component of your salary. So you might ask the employer to reduce the variable component by 10% or the value of ESOPs by 10% and increase the cash component by 10%.