Know about CTC

HAVE never understood my payslip till date, says Avni Rustagi, a native of Punjab. Avni, 25, moved to Bangalore four years back in the hope of turning her dream into reality. In that order, she took up work as a designer with an Information Technology firm. Avni pays Rs 10,000 as rent for a spacious apartment, but ask her about how she manages her other expenses and she throws her hands up in the air. Numbers scare me, she admits. I don`t know a thing about finances. She says, For instance, I don`t even understand my pay structure or CTC as it is called, what I get in hand or why I get that much. Wealth realised that Avni's dilemma is a common problem with most working people. The transformation from CTC to take home leaves mostly everyone confused. Let`s decode and understand what happens when CTC becomes take home.

What is CTC?

CTC is nothing but the cost that the company incurs to employ you and keep you employed. It includes your pay and anything else that the company may incur to keep you in employment. Here is Avni`s CTC or Cost to Company.

Particulars-Rs (per annum)

Basic 480,000
Dearness Allowance 48,000
Entertainment Allowance 12,000
House Rent Allowa`nce 96,000
Conveyance Allowance 12,000
Overtime Allowance 12,000
Medical reimbursement 15,000
Gross salary 675,000
Company`s contribution to provident fund 57,600
Annual CTC 732,600
Monthly CTC 61050

Avni`s salary package is quite transparent. However, each company has its own method of calculating CTC. Companies may offer an attractive CTC pay structure but the take home may be substantially lower. Here are some components that are commonly used in the CTC:

1. IT companies often add training costs in the CTC. These costs are incurred by the company for training the employees. So, naturally these do not come in the form of take home.

2. Banks include interest subsidies in CTC. That is, if you are a bank employee, you are entitled to a discounted rate on loans.

3. Performance bonuses are also included in the CTC. These are variable components and you will be paid out a percentage of the bonus depending on your performance.

4. Companies may include the cost of group medical or life insurance. Some companies may add food subsidies, that is, you may be getting a subsidy on your lunch in the office canteen.
5. Some companies include gratuity in the CTC. Gratuity is a sort of bonus that is paid out when you resign or retire from your company. The catch: You are entitled to gratuity only after completing 5 years in the company. Some companies who include gratuity as part of CTC pay you the propornate amount as ex-gratia, in case you leave the company before completing five year as required.

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NCDs are a Good Investment Option

Non-convertible debentures(NCDs) and fixed deposits issued by companies can turn out to be good investment alternatives given that bank fixed deposits are not offering attractive rates. With several companies vying for investors' attention with these instruments, investors may be spoilt for choice.

Fixed income investors have endured muted returns for some time. The one-year fixed deposit at SBI currently fetches 6.65%, while the five-year deposit earns 6.75%. Even bond funds have fetched insipid returns, clocking around 6%. But recent NCD issues suggest good times. On May 22, Dewan Housing Finance (DHFL) launched its ₹12,000-crore NCD issue, offering a coupon rate of up to 9.1%. It received subscriptions worth ₹10,000 crore the very first day, getting fully subscribed soon after.

Last week, JM Financial Credit Solutions' ₹750 crore issue — offering up to 9.75% coupon rate — got oversubscribed the first day. The rates NCDs are offering are at least 200-250 bps higher than bank fixed deposits of equivalent tenure. For investors in the lower tax brackets, these returns are very attractive. At 9% coupon rate, the post-tax return for an investor in the 10%, 20% and 30% tax brackets works out to 8.1%, 7.2% and 6.3% respectively. Most debentures offer 0.25% higher returns for senior citizens. Investors can opt for monthly, annual or cumulative payout based on their needs.

While the rates are attractive, investors should choose the tenure with care. Most NCDs offer tenures ranging from one to 10 years. Longer tenures typically offer higher rates of interest. With interest rates headed upwards, it is likely that upcoming NCD issues will offer even higher rates than those available now. So locking in a large sum of money at current yields for a long tenure may not make sense. If you opt for a lower tenure instrument instead, it may fetch a lower coupon but you could invest in a higher yield NCD when the current instrument matures.

Alternately, you could opt not to jump in now and wait for higher yield NCDs to hit the market.

RBI is likely to hike interest rates in the near future. Investors should wait and watch before jumping in. Another option would be to deploy part of the surplus money at current rates. You can invest the remaining money as and when more attractive NCD offers come through.

There is no clarity on the interest rate situation. Rates may remain stagnant for some time. In this scenario, it would make sense to lock-in at current rates with part of investible surplus. Either way, it is a better idea to spread your money across two-three companies rather than risking the entire capital with a single issuer.

DON'T IGNORE CREDIT PROFILE

With NCDs, the high yield often comes with an added element of risk — of the company not being able to repay its obligations. Hence ascertain the credit rating assigned to the issue. Typically, companies rated lower than AA carry a high degree of credit risk, even though they offer a much higher coupon rate. Find out if the issuer has a healthy track record of repayment." Avoid opting for unsecured debentures that offer higher coupon; a secured NCD issue is a safer bet as it allows investors a claim on identified company assets in the event of non-payment of dues.  AAA and equivalent rated instruments are safer bets. If at all one has a risk appetite, a small portion of the portfolio may be deployed in lower rated instruments to boost yield. He feels investors should opt for credit risk funds instead. These allow one to capture higher yields, yet the exposure is spread across companies and the onus of evaluating the credit profile of businesses lies with the fund manager.

Even though NCDs are offered in demat mode and can be traded in the secondary market, liquidity is often poor. This may not allow investors to exit at the desired price and time, an issue not faced by credit risk funds.

ALTERNATIVES

Investors could also look beyond NCDs. Several company fixed deposits are on offer at attractive coupon rates. Kerala Transport Development Finance Corporation is offering 8.5% on its 36-month fixed deposits under both regular and cumulative payout option. Shriram Transport Finance – Shriram Unnati fixed deposit fetches 8.15% over a four-year tenure under yearly and cumulative payout option.

An investor can also park money in small finance banks. Fincare offers a coupon rate of 9% for two to three year tenures.

ESAF Small Finance Bank offers 8.75% on its 365-727 day fixed deposit while Ujjivan Small Finance Bank offers 8% for similar tenure. But like NCDs, check the credit profile of the issuer here too.

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