'Basic', cost to company, take-home: Your salary structure explained

How new labour rules will shape your basic salary and gratuity income

Salary decides the appeal of a job offer but once you start working, the amount that actually comes into your bank account is much lower than expected.

 

This confusion happens because most people do not fully understand how salary is structured.

 

Terms like cost to company (CTC), in-hand salary, basic salary, leave encashment and gratuity are commonly used but not always clearly explained.

 

This article breaks down all these concepts in simple language so that anyone, even without a finance background, can understand how salary works in India today.

 

What is a basic salary?

It is the core and fixed part of your salary, forming the foundation of your entire pay structure. It is the amount you earn before adding any allowances (like HRA or bonuses) and before deductions (like tax or PF).

 

In simple terms, basic salary is the guaranteed portion of your income — the part that remains constant every month regardless of performance incentives or extra benefits.

 

Typically, basic salary is:

• 40-50 per cent of your CTC

However, under the new Code on Wages:

• Basic salary must be at least 50 per cent of total CTC

This is a major change introduced to:

• Improve employee benefits
• Increase retirement savings
• Ensure fair salary structures

 

Why basic salary is important

Basic salary shapes many other components:

• PF is calculated on basic
• Gratuity is based on basic
• Leave encashment depends on basic
• HRA is linked to basic

 

What is cost to company?

CTC is the total annual amount that a company spends on an employee. It is the full salary package offered to you, but it is not the amount you receive.

 

CTC includes:

• Basic salary
• Allowances (HRA, travel, etc.)
• Bonuses
• Employer contributions like PF
• Gratuity
• Insurance and other benefits

In simple terms, CTC is the company’s cost, not your income.

 

For example, if your CTC is ₹10 lakh per year, a portion of this amount is not paid directly to you. It includes benefits and contributions made on your behalf.

 

Why CTC is different from in-hand salary

Many people assume that their CTC is what they will earn monthly. This is not true.

 

Your in-hand salary (take-home salary) is the amount that gets credited to your bank account after all deductions.

 

To simply understand, here is the formula:

 

In-hand salary = CTC – deductions – non-cash components

 

Deductions include:

• Income tax (TDS)
• Employee PF contribution
• Professional tax

Non-cash components include:

• Employer PF contribution
• Gratuity
• Insurance
• Other allowances and components

Because of these factors, your take-home salary is usually 15-20 per cent lower than your CTC.

 

What is in-hand salary?

Also called take-home salary, it is the actual amount credited to your bank account every month after all deductions. While CTC reflects your total salary package, in-hand salary is what you receive after subtracting taxes, employee PF contributions, professional tax (where applicable) and other deductions.

 

In simple terms:

 

In-hand salary = gross salary – deductions

 

It is usually lower than your CTC because CTC also includes components like employer PF contribution, gratuity, insurance and other benefits that are not paid directly to you.

 

Example

 

Suppose your monthly gross salary is ₹75,000 and deductions are:

• Employee PF: ₹3,600
• Professional Tax: ₹200
• TDS: ₹4,000

Total deductions = ₹7,800

 

In-hand salary = ₹75,000 – ₹7,800 = ₹67,200

 

Hence, this ₹67,200 is your monthly take-home pay.

 

Understanding your in-hand salary is important because it tells you how much you actually have available for expenses, savings and investments.

 

Leave encashment: Getting paid for unused leaves

 

Leave encashment means converting unused paid leaves into money.

 

Employees are entitled to paid leaves every year. If you do not use them:

• You may receive payment for those unused leaves
• This is called leave encashment
• When Do You Get It?
• At resignation
• At retirement
• Sometimes annually (depending on company policy)

 

How is it calculated?

It is usually based on:

• Basic salary
• Dearness allowance (if applicable)

If you have unused leave days, the company pays you the equivalent salary amount.

For example: 

Suppose an employee has:

• Basic salary: ₹30,000 per month
• Unused earned leaves: 15 days

 

Step 1: Calculate per day salary

 

Most companies calculate daily salary by dividing monthly basic salary by 30:

 

30,000 ÷30 = ₹1,000 per day

 

Step 2: Calculate leave encashment formula

 

Leave encashment = Per Day Salary × Unused Leave Days

So, 1,000 × 15 = ₹15,000

 

Why leave encashment matters

Leave encashment is:

• A hidden financial benefit
• A reward for not using all leaves

It is also part of retirement benefits in many companies. Important:

• Some companies use 26 days (working days) instead of 30
• Calculation is usually based on Basic Salary (sometimes Basic + DA)
• Paid during resignation, retirement, or as per company policy

 

Gratuity, reward for long-term service

Gratuity is a lump sum benefit paid by an employer as a reward for long-term service, traditionally after five years of continuous employment. It is calculated based on your last drawn basic salary and years of service, making it an important retirement benefit.

 

Under the new labour rules, gratuity could become more beneficial for employees. Since basic wages are expected to make up to at least 50 per cent of total salary, gratuity calculations may be based on a higher salary component, potentially increasing payouts. This may slightly reduce in-hand pay due to higher statutory contributions, but improves long-term savings.

 

Another major change is for fixed-term employees, who may now become eligible for gratuity after one year of service on a pro-rata basis, extending this benefit to more workers than before.

 

In short, the new rules aim to make gratuity more inclusive and potentially more rewarding for employees.

 

Suppose an employee has:

• Basic salary: ₹50,000 per month
• Years of service: 10 years

Gratuity is calculated as:

 

Gratuity=15/26 × 50,000 × 10

 

Gratuity payable = ₹2.88 lakh (approx.)

 

If higher basic wages apply under the new labour rules, this gratuity amount could increase further.

 

FAQs

Is CTC the same as in-hand salary?

No. CTC is your total salary package, while in-hand salary is what you receive after deductions.

 

Why is in-hand salary lower than CTC?

Because CTC includes deductions and non-cash benefits like PF, gratuity, insurance and taxes.

 

Why is basic salary important?

Basic salary affects key benefits like PF, gratuity, HRA and leave encashment.

 

How is leave encashment calculated?

Usually as:

 

Daily Salary × Unused Leave Days

 

What changed in gratuity under new labour rules?

Higher basic wage requirements may increase gratuity and some fixed-term employees may qualify after one year.