Two employees could be offered the same annual CTC and still receive very different amounts in their bank accounts every month. The difference can come down to how their compensation is structured, how much is allocated towards statutory benefits and the tax treatment of various components.
This is becoming more important for salaried employees as the new Labour Codes change the way wages are calculated for statutory benefits such as provident fund (PF) and gratuity.
Consider two employees offered a CTC of Rs 20 lakh. Although the headline figure is identical, their monthly in-hand salary, PF contribution, gratuity and usable benefits could vary significantly depending on the structure of their compensation.
Why the wage calculation matters
Under the Code on Wages, basic pay, dearness allowance and retaining allowance are required to account for at least 50 per cent of total remuneration for the purpose of the wage definition.
Where specified allowances and excluded components exceed the 50 per cent threshold, the excess is added back to wages for statutory calculations.
This can increase the amount considered for PF and gratuity.
For employees, the change creates a trade-off. A larger portion of their compensation may go towards long-term retirement benefits, while the amount available as monthly cash could fall.
"Deductions and higher taxation has resulted in lower take-home salary for employees by up to 5 per cent," Vibhore Goyal, Founder & CEO, OneBanc Technologies.
The impact will vary from employee to employee
The effect of the changes will not be uniform across all salary structures.
Employees whose compensation contains fewer benefits or tax-efficient components could experience a more noticeable impact on their monthly income.
At the same time, recent tax-rule changes have increased the limits available under certain employee benefits.
Meal benefits, for instance, can now go up to Rs 200 per meal, which can translate to around Rs 1.05 lakh annually under specified conditions. According to the details cited by Goyal, the benefit is available under both the old and new tax regimes.
The exemption for gifts and vouchers has also been increased to Rs 15,000. Higher limits are available for children's education and hostel allowances under the old tax regime.
These changes provide employers with more options when designing salary packages.
Restructuring could change the take-home calculation
Instead of simply increasing an employee's CTC, companies can restructure the existing compensation package around benefits that employees are eligible for and can actually use.
The aim is to make the existing CTC more efficient rather than necessarily increasing the overall cost to the employer.
"Employees cannot change the law and employers must comply, but salaries can be restructured. Laws tightened wages, new tax laws increased benefit limits. Used properly, that counterweight restores the negative hit," Goyal said.
According to Goyal, effective restructuring could improve in-hand pay by up to 10 per cent while keeping CTC unchanged.
However, the actual benefit will depend on the individual's salary structure, tax regime and eligibility, as well as whether the employee makes genuine use of the benefits offered.
A benefit that appears attractive on paper may have limited value if employees find it difficult to use. Goyal said the platform providing such benefits should be intuitive, work with UPI and cards, be accepted at ordinary merchants and connect with payroll and bank accounts.
What employees should look beyond in a job offer
The changing salary structure could make CTC a less complete measure when employees compare job offers.
Instead of looking only at the annual figure, employees may need to examine how that amount is divided and what they will actually receive each month.
Key questions include:
How much will go towards PF?
- What benefits are included?
- Which benefits are tax-efficient?
- Can I actually use those benefits?
- What will my annual tax liability look like?
The same approach can apply when reviewing an existing salary package. The amount credited to the bank account, statutory contributions and the value of usable benefits can provide a clearer picture of the actual compensation.
Employers could use compensation design for hiring and retention
Salary restructuring could also become relevant for companies competing for employees.
Goyal said companies that have already restructured their packages can offer higher in-hand pay at the same gross compensation. Companies that have not made such changes may find themselves at a disadvantage when candidates compare offers based on their actual monthly income rather than the headline CTC.
The objective, therefore, is not simply to determine how much an employee costs the company. It is also to determine how efficiently that compensation is distributed between statutory contributions, taxes, benefits and monthly cash.
For employees, the practical question may increasingly shift from "What is my CTC?" to "How much will I receive every month, and what benefits am I actually getting in return?"