Learn to decode your CTC and negotiate better pay

Like Shukla, a lot of new entrants in the job market have little idea about how salaries are structured. Broadly, while CTC includes all the payments and benefits, fixed and variable, that you are entitled to, your take-home salary is what you get after all the mandatory deductions, such as Employees’ Provident Fund (EPF) contribution and various taxes. Decoding your salary can be tough but once you do that, you will get an edge when negotiating with your employers and help you budget your savings and expenses effectively. Here’s how to go about it.

Making sense of it

Take a look at your CTC break-up and you will find fixed heads like basic pay (usually 40-50% of the CTC), home rent allowance (usually 40-50% of the basic salary), gratuity, PF, and reimbursements such as car fuel and mobile bills, apart from variable components such as annual bonus and performance bonus. However, all these heads won’t show up in your monthly salary.

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First, gratuity and PF contributions will be deducted from the salary. For Shukla, the most confusing bit was to understand how PF contributions work. While the employee is supposed to contribute 12% of the basic pay and dearness allowance in the PF account, the employer is supposed to deposit an equal amount. Typically, employers include their share of PF contribution in the CTC. “I had a hard time understanding why my in-hand salary was not adding up to what I had expected," said Shukla. In order to lower the base salary, some organizations introduce a specialization pay or a similar component. “The higher the basic, the higher your EPF contribution would be, so you need to be careful of a very high basic component because that would mean less take home pay. But high basic also means that you will be eligible for higher gratuity (which is paid at the time of leaving the company provided you have completed five years with the employer)," said Shweta Jain, certified financial planner, chief executive officer and founder, Investography Pvt. Ltd.

Remember that PF money comes back to you with interest at the time of retirement and also helps you avail tax deduction up to ₹1.5 lakh under Section 80C of the Income-tax Act.

That, however, may not be the case with variable payouts, which is the second head that may not show up in your salary, depending on whether your employer pays it monthly, quarterly or annually. Employers are not mandated to pay the full variable pay mentioned in the CTC as it is linked to your performance, your team’s performance or your company’s profit.“Understand that the employee is eligible to receive full variable payment only if all the parameters are met. The variable component is paid out on a monthly, quarterly, half yearly or annual basis. It is essentially a performance-linked pay," said Rituparna Chakraborty, executive vice-president and co-founder, Teamlease Services Pvt. Ltd, a human resource company.

Even for sales-related jobs, where having a higher variable component could work because these jobs are predominantly performance-linked, this could come to bite during a slowdown, said Jain. The financial planner has seen many sales employees struggle and draw half their salaries during rough times.

The reimbursement component or allowances, which you can typically claim by producing the relevant bills and receipts, may not show up either if you don’t make the claim every month. Some organizations even create a separate account, which is credited at a different date than your salary, for the reimbursement component. But the good part is that most of the allowances qualify for tax benefit. So even if this does not show up in your salary upfront, it will ultimately add to your in-hand salary by reducing your tax liability.

If all that made your salary packet thinner, brace for more. If you have taxable income, you will end up paying a chunk in taxes every month. Typically, employers calculate tax liability for the year and deduct it in instalments throughout the year.

Getting the best deal

While you may not be able to negotiate in your first job due to lack of experience and awareness, while switching jobs, you can do some course correction. By his second job, Shukla had wisened up. The variable component in his CTC was as high as 20% of the basic pay. He negotiated with the company to convert about 40% of the variable component into joining bonus. “This (joining bonus) got added up with the contingency amount which I would have to pay the employer if I resigned within a year," said Shukla.

It is advisable to negotiate for a higher take-home salary and a lower variable portion when you are just starting out. However, if you are in the higher income bracket and want to leave an impression about your capabilities, negotiating higher on the variable pay could work for you. “This sends the signal that you’re someone who walks the talk. It shows that you’re someone who is confident of her skills. In the long run this would keep you more relevant and agile with respect to market dynamism," said Chakraborty.

You can also negotiate within the same job at the time of annual appraisals. In case of a hike, more often than not, the overall CTC is revised and not just the components that form your take-home salary. “Identify which part of your CTC has increased. If the rise is under fixed components, you will definitely take home more money. However, if the hike is under the variable head, you must negotiate with the employer and ensure your direct benefits such as PF and gratuity see a rise,"said Basavaraj Tonagatti, a Sebi-registered investment adviser and certified financial planner.

Understanding which salary components work for you early on can help you maximize not just your monthly income but can also free up money for investments in the long term. Shukla feels if employee contracts or the CTC document can be more transparent, it can help beginners to a great extent. Take the lead and make sense of your salary structure now.