CTC vs in-hand salary: where the money goes

An offer letter says ₹18 lakh CTC. Divide by twelve and you get ₹1,50,000 a month. The first salary credit is closer to ₹1,14,000. Nothing has gone wrong. CTC is the employer's total cost of employing you, and several parts of it never reach your bank account, or reach it only once a year, or only when you leave. Here's where each rupee goes, using one example from start to finish.

The example offer

Say the offer is ₹18,00,000 CTC with a fairly typical shape: basic at 40% of CTC, HRA at 20% of CTC, an annual performance bonus of ₹1,00,000, employer PF at 12% of basic, a gratuity provision, and a special allowance that fills whatever is left. You live in a state that levies the full ₹2,500 a year of professional tax, and you've chosen the new tax regime.

Basic, HRA and the special allowance

Basic is the anchor. PF, gratuity and the HRA exemption are all calculated from it. Here it's ₹7,20,000 a year, or ₹60,000 a month.

HRA is ₹3,60,000. In the new regime it's fully taxable, like any other allowance. In the old regime part of it can be exempt if you pay rent. With ₹25,000 a month of rent in a metro, the exemption is the lowest of HRA received (₹3,60,000), rent minus 10% of basic (₹3,00,000 − ₹72,000 = ₹2,28,000) and 50% of basic (₹3,60,000). So ₹2,28,000 would be exempt.

The special allowance is whatever remains after everything else: ₹18,00,000 − ₹7,20,000 − ₹3,60,000 − ₹1,00,000 − ₹86,400 − ₹34,615 = ₹4,98,985. It's fully taxable. When the structure changes, this is the line that absorbs the difference.

One recent change is worth knowing about. Under the labour codes that came into force in November 2025, the wages used for PF and gratuity can't be kept artificially low by shifting pay into allowances; broadly, allowances above half of total pay get added back to wages. Several employers have restructured salaries as a result. If your basic looks unusually low, ask HR how they compute PF and gratuity wages before you compare offers.

Employer PF: in your CTC, not in your salary

Your employer contributes 12% of basic, ₹86,400 a year, to your provident fund. It's part of the CTC but never shows up in the monthly credit. Separately, 12% of basic is deducted from your pay as your own contribution, another ₹86,400. Together, PF takes ₹1,72,800 a year out of the cash picture, though all of it is still your money, held for retirement. For employees who are members of the pension scheme (EPS), up to ₹1,250 a month of the employer's share goes there instead of to the EPF balance. The EPF calculator shows how both shares build up over a career.

Some employers calculate PF on the statutory wage ceiling of ₹15,000 a month instead of full basic. Then each side contributes ₹1,800 a month, or ₹21,600 a year. The ₹64,800 difference on the employer side moves into the special allowance, and the same ₹18 lakh offer pays about ₹1,23,381 a month in hand instead of ₹1,13,705. More cash now, much less retirement saving. Neither is wrong, but when you compare two offers, compare them on the same PF basis.

Gratuity: money you get only if you stay

Gratuity is paid when you leave after at least five years of continuous service, with exceptions for death and disablement, and separate rules under the labour codes that let fixed-term employees qualify after one year. For employers covered by the law, the formula is last-drawn monthly wages × 15 ÷ 26 × years of service. Many employers include the yearly equivalent in CTC. Here that's ₹60,000 × 15 ÷ 26 = ₹34,615.

That ₹34,615 isn't paid to you every year. If you leave after three years in a regular job, you usually get none of it. If you stay ten years and your basic has grown to, say, ₹1,00,000 a month, the payout is ₹1,00,000 × 15 ÷ 26 × 10 = ₹5,76,923. It's based on your last salary, not the sum of the yearly provisions. Gratuity is tax-free up to a lifetime limit of ₹20 lakh for private-sector employees. The gratuity calculator handles the rounding of partial years and the tax-free portion.

Professional tax and income tax

Professional tax is a state levy, capped at ₹2,500 a year. Some states charge less and a few don't levy it at all, and the monthly deduction isn't always the same amount every month. In the old regime it reduces your taxable income; in the new regime it doesn't, though it still comes out of your pay.

Income tax is deducted at source by your employer each month as TDS, based on the regime you declared and, in the old regime, the investment proofs you submit. For this example under the new regime: gross salary is CTC minus employer PF and gratuity, so ₹18,00,000 − ₹86,400 − ₹34,615 = ₹16,78,985. Subtract the ₹75,000 standard deduction and taxable income is ₹16,03,985. Tax is ₹20,000 + ₹40,000 + ₹60,000 on the first ₹16 lakh, plus 20% of the remaining ₹3,985 (₹797), so ₹1,20,797. With 4% cess the total is ₹1,25,629. The income tax calculator shows this slab by slab for any figure.

Under the old regime, with the ₹2,28,000 HRA exemption, the ₹86,400 employee PF counted under 80C, the ₹50,000 standard deduction and ₹2,500 of professional tax, deductions total ₹3,66,900 and taxable income is ₹13,12,085. Tax comes to ₹2,14,371 with cess. Without other deductions, the new regime is ₹88,742 cheaper here. Old vs new tax regime explains how much you'd need to deduct for that to flip.

Putting it together

Cash you actually receive in the year is the gross salary of ₹16,78,985, minus employee PF of ₹86,400, professional tax of ₹2,500 and income tax of ₹1,25,629. That leaves ₹14,64,456.

The bonus arrives once, so your regular monthly credit is (₹14,64,456 − ₹1,00,000) ÷ 12 = ₹1,13,705. If the bonus is paid in full, the average across the year is ₹14,64,456 ÷ 12 = ₹1,22,038 a month. Against a CTC of ₹1,50,000 a month, the regular credit is about 76% of it. That ratio isn't a rule. It moves with your PF basis, your bonus share, your state and your tax regime, which is why a fixed percentage from a forum post is a poor guide.

Payslips won't match this exactly month to month. Employers often deduct more TDS in later months once they know your bonus or have your proofs, and some states collect professional tax unevenly. Form 16 at the end of the year is where it all reconciles.

What to ask before you accept an offer

• Is the bonus or variable pay guaranteed, or linked to ratings and company performance? A variable component may pay out at a fraction of the figure in the CTC.
• Is PF calculated on full basic or on the ₹15,000 monthly ceiling?
• Is gratuity included in the CTC? Is anything else, such as group insurance premiums, meal cards or a joining bonus that has to be repaid if you leave early?
• What is the fixed monthly gross? That's the number to plan rent, EMIs and SIPs around.

Once you have those answers, put the fixed components into the salary calculator with your state's professional tax and the right PF basis, then compare the monthly figure with your current payslip rather than your current CTC. That comparison is the real size of the raise.