CTC vs take-home pay: New tax regime gives better visibility

“Is the 30% hike on your in-hand salary?” the father asked.

“It’s on the CTC. Increase in take-home can’t be too off-the-mark,” Sanjay replied.

“Well, it depends on how the CTC is structured. How many components does it have?”

“About ten. Five of these are new if I compare them to my current CTC. Now that you mention, variable pay also looks much bigger. This is quite confusing; how should I calculate my in-hand pay?” Sanjay asked.

“Mail me the offer letter as well as your current salary annexure. I’ll calculate and explain,” his father said.

“Well, your in-hand increase is 20%. The House Rent Allowance (HRA) is lower in the new offer and Leave Travel Allowance (LTA) has been added. Like you pointed out, variable pay is almost 40% of your fixed pay as opposed to 15% in your current job. Some flexi benefits have been added, but these can only be claimed on actual bills. Also, did you ask the company if they will deduct their own EPF contribution from your fixed pay as that will further reduce the in-hand,” he explained.

“Wait, that’s a lot of jargon,” laughed Sanjay.

“I would suggest that you ask the company to offer you a simpler CTC that will give you more visibility on your take-home pay. In fact, since you have started filing your tax return in the new tax regime, ask them to structure the CTC accordingly,” said his father.

New regime gives better visibility

Sanjay’s father is right to suggest that he ask the Human Resource (HR) professional to structure the CTC, the gross annual salary, as per the new regime. This will give Sanjay better visibility over his take-home pay, as there will be fewer tax-saving components.

For instance, HRA, LTA, meals, and children’s education allowance are unavailable. So the fixed pay has less components, and subsequently makes it easier to calculate the TDS. Further, since Sanjay won’t be claiming any tax deductions, which salaried individuals often do under the old regime to maximise tax-saving, the TDS calculation will be straightforward.

Also Read: No home loan or HRA? The old tax scheme may not be right for you

It should be noted that the decision between the two tax regimes should be based on which one saves you more tax and not because it makes your CTC structure simpler.

As per data from Central Board of Direct Taxes (CBDT), about 72% of tax returns for financial year 2023-24 filed until 31 July were under the new regime. Since the majority of taxpayers have moved to the new tax regime, it is now easier to calculate the expected in-hand in different gross salary ranges, especially useful in negotiating salaries at the time of recruitment.

How to calculate take-home pay

To calculate in-hand pay versus CTC, one should understand the composition of CTC and its taxation. It has three parts–fixed pay, variable pay anddeductibles.

Fixed pay comprises basic pay, tax-free reimbursements for conveyance, phone bills, fuel, and allowances, and a special allowance, a direct monetary benefit that is fully taxable. In the old regime, HRA and LTA were also part of fixed pay.

In the new tax regime, tax-free allowances available to employees include uniform, medical insurance, gadgets, car lease, fuel and driver’s salary reimbursement.

“Under the new tax regime, car lease allowances can be exempt from tax when structured correctly along with driver allowances, which are also typically tax-free if supported by receipts; and fuel reimbursements for business-related travel, are not subject to tax,” said Arpita Sarkar, regional reward leader, Randstad APAC.

She added supporting bills and receipts are a must to claim most of these reimbursements. “Without proper documentation, these components may be subject to tax as part of the salary.”

The second component is variable pay, which includes annual bonuses, stock options, and performance-linked incentives. These, too, are fully taxable.

Third are the mandatory deductibles of employer’s Employees’ Provident Fund (EPF) contribution and gratuity, which are 12% and 4.81% of the basic pay, respectively.

“Apart from EPF and gratuity, employees are subject to professional tax, which varies state-wise,” said Sarkar.

Ulka Shukla, pre-IPO HR consultant and leadership coach, Tyche Consultants, said the National Pension Scheme (NPS) is an optional deductible available under the new tax regime where the employer’s contribution of up to 14% of basic pay is tax-free. “At high income levels where tax-saving avenues reduce, we encourage employees to take the NPS option,” she said.

Fixed pay is the main component that determines your monthly in-hand pay, while variable pay is paid bi-annually or annually as a lump sum. Deductibles are indirect benefits that you get in the form of pension or gratuity which is paid after the employee leaves the company after continuous five years of working with it.

To calculate the in-hand pay, add the basic pay and special allowance. Say, this addition gives X amount, on which TDS is determined as per tax slabs. Since most tax-saving deductions, like Section 80C, 80D, home loan, HRA etc are not claimed in the new regime, calculation of TDS is straightforward.

As a next step, TDS along with contributions to Employees’ state insurance corporation (ESI), capped at ₹21,000 annually, Labour Welfare Fund (LWF) and employee’s 12% contribution to EPF is deducted from X. The resultant amount is your net pay.

Now, tax-free allowances or reimbursements are added to the net pay, which is the take-home salary.

Know your in-hand

Given the limited components in the new regime,Mintcalculated take-home salary at different gross salary levels (see grfx). The methodology assumes basic pay, tax-free allowances and special pay to be 30%, 15% and 40% of the gross annual salary and variable pay as 12% of the fixed pay. These assumptions are for incomes upto ₹50 lakh as per the industry trends. There could be variations in some cases depending on companies using a different CTC structuring method across industries and seniority levels.

For instance, in entry-level roles variable pay is generally lower, but it can be higher for certain roles, pointed out Shukla. “The performance-linked incentives are higher in roles that directly impact business building. For instance, in a BD (business development) role incentive will be higher so that it drives the employee to get more deals. So, variable pay varies greatly as per functions.”

Sarkar concurred. “The specific allocation of variable pay also varies by industry. For instance, sectors like sales often feature higher variable pay components due to the direct correlation between individual performance and revenue generation. In contrast, administrative roles may have lower variable pay percentages.”

But in most cases, in seniority roles, variable pay can be equal to or higher than basic pay. “For senior-level positions, variable pay can reach 30% to 50% of the fixed salary, reflecting greater responsibility and impact on company performance,” said Sarkar.

Considering this,Mint has estimated take-home pays for incomes from ₹60 lakh to ₹1 crore separately with higher variable pay of 45% and lower share of tax-saving allowances at 10%. In higher income ranges, the amount of tax-saving allowances become smaller vis-a-vis CTC as most of these are based on work-related expenses which can’t increase beyond a certain amount.

Further, our income estimate considers a 15% range that covers variations of higher tax-saving allowances and lower basic pay. These income ranges give a fair idea of what post-tax, in-hand salaries look like at different income levels under the new tax regime.

Sanjay’s is a hypothetical case.

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