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CTC Components and Their Taxability

  

The term “CTC” is kind of misleading. But, it clings on based on a technicality. “Cost-to-company” is technically correct, since it’s the cost companies incur on an employee. But, why should an employee care about the cost to the company? He only cares about what he gets. And what he gets is very different from the cost incurred by the company. But, in the long run, he gets almost what was promised. In this post, we are going to discuss some of the common CTC components, their benefits to employees, and their taxability.

Table of Contents

CTC Components table

Sl.
No. 		Particulars Received in Cash /
Benefit availed in future 		Taxability
1 Basic Salary Cash Fully taxable
2 House Rent Allowance Cash Exempt, with some conditions#
3 Dearness Allowance Cash Fully taxable
4 Leave Travel Allowance Cash Exempt, with some conditions*
5 Conveyance Allowance Cash Exempt, up to Rs. 19,200 per year
6 Special Allowance Cash Fully taxable
7 Other Allowances Cash and kind Mostly taxable*
8 Reimbursements Cash Not taxable
9 Provident Fund Future Benefits Not taxable, up to Rs. 7.5L*
10 Gratuity Future Benefits Exempt, with some conditions*
11 Variable Pay / Bonus Cash Fully taxable 

#I have discussed more on this here
*Briefly explained in coming sections

Leave Travel Allowance

LTA is an allowance provided by employers to cover the travelling charges of employees. It is exempt up to the actual cost of travel or actual allowance, whichever is lower. Allowed only one travel in a year, and only twice in a block of 4 years. (Block is fixed – Ex: 2018-21, 2022-25 and so on. Note: This is calendar year and not financial year). Also, exemption is only for domestic travel for employee alone or with his family.

Other Allowances and Services

  1. Food Coupons: Up to Rs. 50 per meal is exempt from tax
  2. Free Cab Service: Not taxable
  3. Children Education Allowance: Up to Rs. 100 per month per child up to a maximum of 2 children is exempt
  4. Stock Options: Taxable as capital gains as and when sold

Provident Fund

The law requires employers to match the PF contribution of employees up to 12%. So, the contribution by employers is neither a deduction nor a perquisite. And the contribution made by the employee is allowed as a deduction under section 80C. But, what happens when you are contributing a higher amount and employer too contributes the same amount? Contributions by employers above Rs. 7.5 lakhs on PF, NPS and Superannuation Fund combined will be treated as perquisites and taxed as salary.

Gratuity

Gratuity is a kind of “Thank you” from employers in monetary form. But, it is only given in the following situations:

  1. On superannuation
  2. On retirement or resignation
  3. On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

Eligibility:

  1. The employee should be drawing wages as a full-time employee of an organisation. An apprentice is not eligible to receive gratuity.
  2. The employee should be in continuous service for a minimum of 5 years.
  3. The employee can also get gratuity upon resignation, superannuation, disablement due to accident or disease, or death.

The least of the following is exempted from taxation:

  1. Last salary (basic + DA)* number of years of employment* 15/26
  2. Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment)
  3. Gratuity Actually received

There are other certain conditions for applicability and taxability. I will discuss it in a different post.

That’s it, folks! Though I haven’t covered all the components of all the companies, these are the major ones and common ones. Hope you learnt something today. Keep learning and keep getting fit.

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