What is CTC & Its Role in Obtaining a Personal Loan?

Posted on Friday, July 26th, 2024 | By IndusInd Bank

When you’re planning to apply for a personal loan, your income plays a key role in determining whether you’ll get approved, how much you can borrow, and at what interest rate. One term that often pops up during this process is CTC, or Cost to Company. But what exactly does it mean, and why do lenders care so much about it? Let’s break it down in detail and understand how CTC influences the personal loan application process.

What is CTC? What are its Components?

CTC, short for Cost to Company, is the total amount an employer spends annually on an employee. This figure includes not just your in-hand salary but also various perks, allowances, bonuses, and retirement benefits that form part of your compensation package. It’s a comprehensive figure and not necessarily the amount you take home each month.

For lenders, CTC offers a broader picture of your income and financial stability, helping them assess your loan repayment capacity more accurately.

Key Components of CTC

Your CTC is a mix of fixed, variable, and additional perks or retirement benefits. Let’s break it down to understand what each part includes.

Fixed Salary Components of CTC

These are the stable, predictable parts of your salary—paid regularly and often used to calculate your monthly take-home pay.

Basic Salary

This is the core component of your salary. It is fully taxable and forms the basis for other allowances like HRA and provident fund contributions.

House Rent Allowance (HRA)

HRA is given to employees living in rented accommodation. This allowance can offer tax benefits, depending on your city of residence and rent amount.

Special Allowance

This is a broad category that includes various miscellaneous payments, which do not fall under any specific head. It’s fully taxable and varies from company to company.

Variable Salary Components of CTC

These components depend on performance, targets, or other criteria and are not fixed each month.

Incentives or Bonuses

Performance bonuses, sales incentives, or annual appraisals fall under this category. Since they’re not consistent, lenders consider them secondary when evaluating loan eligibility.

Leave Travel Allowance (LTA)/Leave Travel Concession (LTC)

LTA covers travel expenses incurred during holidays within India and can be claimed as a tax exemption under certain conditions.

Other Perks and Benefits

These are non-monetary or additional monetary benefits that form part of the total CTC but may not directly reflect in your take-home salary.

Phone and Internet Allowance

Many companies reimburse your mobile and internet bills, especially in hybrid or remote work settings. These are tax-efficient components of CTC.

Indirect Elements

These include training programs, food coupons, subsidized meals, or wellness programs that enhance your work experience but don’t add to your direct income.

Conveyance Allowance

This allowance is meant to cover your daily commute expenses and is usually a fixed monthly amount. It may also offer some tax benefits.

Medical Allowance

This covers medical expenses up to a certain limit annually and can also be used for claiming tax deductions.

Retirement Benefit Components in CTC

These elements secure your financial future and are calculated as long-term benefits rather than monthly earnings.

• Provident Fund (PF): A mandatory savings scheme where both employee and employer contribute monthly.
• Gratuity: A lump sum paid by the employer as a token of appreciation after five years of continuous service.
• Pension Contributions: If part of your employment contract, these are also factored into your total CTC.

How to Calculate CTC?

Now that you know what CTC is in your salary slip, let’s look at how to calculate it. 

Using a simple illustration for this purpose: 

1. Basic Salary: ₹5,00,000 per annum
2. HRA: ₹2,00,000 per annum
3. Medical Allowance: ₹15,000 per annum
4. Transport Allowance: ₹24,000 per annum
5. Bonuses and Incentives: ₹50,000 per annum
6. Employer’s PF Contribution: ₹60,000 per annum
7. Gratuity: ₹20,000 per annum
8. Perquisites: ₹30,000 per annum

Total CTC = Basic Salary + HRA + Medical Allowance + Transport Allowance + Bonuses + Employer’s PF + Gratuity + Perquisites

Total CTC = ₹5,00,000 + ₹2,00,000 + ₹15,000 + ₹24,000 + ₹50,000 + ₹60,000 + ₹20,000 + ₹30,000

So, here the total CTC = ₹8,99,000 per annum. 

You can use the above illustration to calculate what your current CTC is. 

How Does CTC Affect Your Personal Loan Application?

Your CTC plays a crucial role in determining your loan eligibility and the amount you can borrow. Here’s how:

·         Loan Eligibility

Banks assess your repayment capacity based on what your current CTC is. A higher CTC translates to a higher income. This can increase your chances of loan approval.

·         Loan Amount

Your CTC influences the loan amount you are eligible for. A higher CTC often allows you to borrow a larger sum.

·         Interest Rates

A healthy CTC may sometimes lead to more favourable interest rates on your personal loan.

Hence, when you apply for a personal loan, banks will probably ask, “What is your current CTC?”. This information helps the bank evaluate your financial stability and determine the loan terms it can offer. 

To make your repayment strategy more effective, consider using a Personal Loan Calculator from IndusInd Bank. This tool provides an estimate of your EMIs so that you can choose the loan amount and tenure as per your budget. 

Also Read: Top-Up Loan vs. Personal Loan – Which One is the Best Option?

Summing Up

Understanding your CTC goes beyond just checking your annual salary figure. It plays a crucial role in how lenders perceive your ability to repay loans and manage your finances. Whether you’re planning a big purchase, consolidating debts, or funding a personal milestone, knowing how your salary structure influences your personal loan eligibility can help you make better financial decisions.