Salary structure and CTC breakup, fully explained

Cost to Company (CTC) is the total annual cost an employer bears for an employee. It is not the same as take-home pay, and the gap between the two surprises almost every new joiner. Understanding the structure helps HR design packages that are fair, tax-efficient and statutorily sound.

What CTC actually includes

CTC bundles together several things that the employee experiences very differently:

• Fixed pay: Basic, HRA, special allowance and other cash components.
• Allowances and reimbursements: LTA, conveyance, telephone and similar heads.
• Employer statutory contributions: employer PF and, where applicable, ESI.
• Retirement accruals: gratuity accrual, which is a cost even though it is paid only on exit.
• Variable pay: performance bonus or incentives, often shown at target.

The key insight is that employer PF and gratuity are part of CTC but never reach the employee's bank account as monthly salary. That is a large part of why in-hand is lower than CTC divided by twelve.

Why Basic salary is the anchor

Basic salary drives almost everything else:

• PF is 12% of Basic (or Basic + DA).
• Gratuity accrues on Basic.
• HRA exemption limits are 50% or 40% of Basic.
• Statutory bonus keys off Basic + DA.

A very low Basic reduces statutory contributions and boosts short-term take-home, but it also reduces retirement savings and can breach the Code on Wages, which, since 21 November 2025, treats excluded allowances above 50% of total remuneration as wages, raising PF, gratuity and bonus bases. See the 50% wage rule.

A full worked example

Take a CTC of ₹12,00,000 with Basic set at 50% of CTC.

Component	Amount per year
Basic (50% of CTC)	₹6,00,000
HRA and other allowances	₹5,35,140
Employer PF (12% of basic, capped at the ₹25,000 wage ceiling)	₹36,000
Gratuity accrual (4.81% of basic)	₹28,860
Gross (CTC minus employer PF and gratuity)	₹11,35,140

From the gross, the employee's own deductions come off to reach in-hand:

Deduction from gross	Amount per year
Employee PF	₹36,000
Professional tax	₹2,400
TDS (new regime, few deductions)	₹0 (below the ₹12 lakh rebate)
In-hand per year	₹10,96,740

So a ₹12 lakh CTC yields roughly ₹91,400 per month in-hand for this profile, using the ₹25,000 PF wage ceiling in force from 17 September 2026. Change the assumptions (a different Basic percentage, a home loan, the old regime) and the in-hand shifts.

Designing good structures

A well-designed structure balances three goals: healthy take-home, tax efficiency, and statutory adequacy. Flexible benefit plans (FBP) let employees allocate parts of their pay to tax-friendly heads such as fuel, telephone or LTA, within limits and against proofs. But structures should not be so aggressive that they fall foul of the Code on Wages or leave retirement savings too thin.

Common mistakes to avoid

• Setting Basic too low to inflate take-home, breaching the Code on Wages.
• Presenting CTC to candidates without explaining the in-hand gap.
• Forgetting that employer PF and gratuity are CTC but not salary.
• Building structures that are hard to administer across grades.

Frequently asked questions

Why is my in-hand so much less than CTC? Employer PF, gratuity, employee PF, PT and TDS all sit between CTC and in-hand.

What is a good Basic percentage? Commonly 40% to 50% of CTC, balancing take-home and statutory adequacy.

What is FBP? Flexible Benefit Plan, letting employees allocate pay to tax-friendly heads against proofs.

Key takeaways

• CTC includes employer contributions and accruals that are not paid as salary.
• Basic anchors PF, gratuity, HRA limits and bonus.
• In-hand is gross minus employee PF, PT and TDS.
• Structures must respect the Code on Wages and stay administrable.

NeevHR lets you define pay structures as reusable components and assign them to employee groups, so a new grade or entity does not need a new spreadsheet, and every payslip is consistent.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 03 Nov 2026.