Hello Insiders,

Have you ever stared at an offer letter, wondering how much of that CTC will actually end up in your bank account?

Last weekend, I was talking to a friend who recently graduated from IIM-A and bagged an annual package of ₹48LPA. It was one of the highest packages among her batchmates. She was extremely elated, and of course for the right reasons. It was going to be her first job ever and bagging such a high package is a hefty cool achievement.

But she wanted to know how much of that CTC will actually end up being in her bank account. That’s when she showed me her offer letter and asked me to calculate a rough in-hand salary for her.

So, I thought why not do it for you guys as well? While I can’t name her or her company or show you the exact offer letter, I’ll break down the CTC in its entirety and try to explain you all the layers in detail.

Firstly, what’s CTC?

CTC or Cost to Company is the total amount an employer would spend on an employee in a year. It includes several components, some of which are direct benefits (like basic salary, house rent allowance), while others are indirect (like employer contributions to Provident Fund, Medical insurance, etc) or even non-cash benefits (like free meals, cab service).

Breaking Down ₹48 LPA CTC

To understand what this means on a monthly basis, and more importantly, what you actually take home, let's break down a typical ₹48 LPA package:

1. Fixed Salary: ₹18 lakhs

   • Fixed Salary is the guaranteed part of your compensation.

2. Variable Pay: ₹7 lakhs

   • Variable Pay typically depends on employee’s and company’s performance and policies.

3. Employee Stock Option Plan (ESOPs): ₹18 lakhs, vested over 4 years

   • ESOPs are a form of long-term incentive to keep you invested in the company’s success.

4. Joining Bonus: ₹2 lakhs

   • Joining Bonus is a one-time payment

5. Retention Bonus: ₹3 lakhs (paid after 3 years of employment)

   • Retention Bonus is paid out to retain talent in the company.

Calculating the In-Hand Salary

To calculate the monthly in-hand salary, we need to consider only the annual components that you receive in your bank account monthly. ESOPs are not liquid cash until vested and sold, and bonuses are typically one-time payments.

Here’s the monthly breakdown:

• Fixed Salary: ₹18 lakhs per year translates to ₹1,50,000 per month.

• Variable Pay: If fully paid (assuming best-case scenario), ₹7 lakhs per year is about ₹58,333 per month. However, this is often subject to performance and may not be fully guaranteed.

• Monthly Take-Home Before Taxes: ₹1,50,000 (Fixed) + ₹58,333 (Variable if fully paid) = ₹2,08,333

Tax Deductions

To calculate the net in-hand salary, tax calculations based on the current tax slabs must be applied. Let’s assume you fall into the highest tax bracket (30% above ₹10 lakhs income), considering your income level. We will apply a simplified model for tax calculation without deductions or exemptions for the sake of clarity:

• Income Tax: The tax on ₹25 lakh (Fixed + Variable, if fully paid) could be approximately ₹5.69 lakhs annually (this is a simplified calculation as per old regime and actual tax can vary based on deductions and other factors).

• Monthly Tax: About ₹47,417

• Net Monthly In-Hand Salary: ₹2,08,333 - ₹59,333 = ₹1,60,916 approximately

(Again, this is a basic approximation. Actual in-hand salary could be different based on exact tax deductions, tax-saving investments, and actual payout of variable components)

Additional Considerations

• Joining Bonus and Retention Bonus are not included in monthly calculations as they are one-time payments. These would increase your cash inflow in the specific months they are paid.

• ESOPs provide additional value but are contingent on the company's stock performance and are not liquid until vested and sold.

Conclusion

While a ₹48 LPA package sounds substantial, the actual monthly take-home salary after taxes and excluding non-regular components like ESOPs and bonuses stands around ₹149,000. It’s crucial for professionals to understand their salary breakdowns to plan their finances effectively.

Share this with a friend, colleague or your boss (I dare you! 😈)

See you in the next one, bye! 👋🏻