Isn't it illegitimate on the part of the employer to mention a gratuity component in the CTC until the employee completes 5 years?
Especially since:
1. The employee is not eligible for this component until he completes 5 years, so why deduct this from his CTC for the first 5 years?
2. He is not even eligible under the PGA 1972 if his Basic + DA is above Rs. 10,000, yet many companies still include this in his/her CTC. Isn't this a very common scenario and a cause of confusion at the time of employee exit?
What happens to the money that is deducted from the employee's CTC year after year should he leave short of 5 years.
I see many responses here just stating that PGA is not applicable until 5 years. But that is not the question being raised here. No one is questioning PGA 1972. Please stay focused on this. What is being questioned is what happens to the amount under the following circumstance.
[CASE 1] Employee leaves in 4 years. His/her CTC included Gratuity component in the Annual Appraisal for the last 3 years, his/her Basic + DA was from the start well above Rs. 10,000, and yet the company cited 'as per PGA 1972' against the Gratuity component despite the above. The company made the deduction from employees for the last 3 years under the guise of it being retained towards accrued gratuity despite not being applicable.
Now that the employee is leaving and demands payment of this through an Ex-Gratia Payment. I understand that this is the general practice followed by many honest companies to revert the amount via an Ex Gratia payment.
From India, Pune
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1Especially since:
1. The employee is not eligible for this component until he completes 5 years, so why deduct this from his CTC for the first 5 years?
2. He is not even eligible under the PGA 1972 if his Basic + DA is above Rs. 10,000, yet many companies still include this in his/her CTC. Isn't this a very common scenario and a cause of confusion at the time of employee exit?
What happens to the money that is deducted from the employee's CTC year after year should he leave short of 5 years.
I see many responses here just stating that PGA is not applicable until 5 years. But that is not the question being raised here. No one is questioning PGA 1972. Please stay focused on this. What is being questioned is what happens to the amount under the following circumstance.
[CASE 1] Employee leaves in 4 years. His/her CTC included Gratuity component in the Annual Appraisal for the last 3 years, his/her Basic + DA was from the start well above Rs. 10,000, and yet the company cited 'as per PGA 1972' against the Gratuity component despite the above. The company made the deduction from employees for the last 3 years under the guise of it being retained towards accrued gratuity despite not being applicable.
Now that the employee is leaving and demands payment of this through an Ex-Gratia Payment. I understand that this is the general practice followed by many honest companies to revert the amount via an Ex Gratia payment.
From India, Pune
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you mean to say if employees leaves with in five years he can ask his gratuity payment made from his CTC?
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Thanks to CITEHR, even my company used to mention the gratuity component in CTC. I was also a victim of it. However, after forwarding the previous link of CITEHR on the gratuity issue to the Director of HR and subsequent discussion, they have agreed to remove it from CTC. If it is deducted, you have the right to demand it back when leaving prior to the completion of 5 years.
From India, Mumbai
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From India, Mumbai
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Dear Members,
As the preparation of CTC of any employee is being done by HR personnel only, it is the responsibility of HR professionals not to misguide the management by including the gratuity component in CTC. Therefore, it is the prime responsibility of the management to consider the case and prepare CTC without the gratuity component as the employee is not eligible before five years.
In my view, as per the Payment of Gratuity Act, the gratuity fund is to be maintained with LIC, and from the first year itself, the share of gratuity on behalf of the employee is to be paid to LIC. The management feels that it is a cost involved as part of CTC. But they should not treat it like this.
Regards,
M Srinivas
Asst Manager - HR
Ramky Group of Companies
Hyderabad
9866005600
From India, Hyderabad
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As the preparation of CTC of any employee is being done by HR personnel only, it is the responsibility of HR professionals not to misguide the management by including the gratuity component in CTC. Therefore, it is the prime responsibility of the management to consider the case and prepare CTC without the gratuity component as the employee is not eligible before five years.
In my view, as per the Payment of Gratuity Act, the gratuity fund is to be maintained with LIC, and from the first year itself, the share of gratuity on behalf of the employee is to be paid to LIC. The management feels that it is a cost involved as part of CTC. But they should not treat it like this.
Regards,
M Srinivas
Asst Manager - HR
Ramky Group of Companies
Hyderabad
9866005600
From India, Hyderabad
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Dear Sir,
What about those employees who leave the company within 3 years and still have gratuity as a part of their CTC? Aren't they also eligible to receive the money because it's a part of their CTC?
Please reply.
Thanks and regards,
Chini.
From India, Mumbai
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What about those employees who leave the company within 3 years and still have gratuity as a part of their CTC? Aren't they also eligible to receive the money because it's a part of their CTC?
Please reply.
Thanks and regards,
Chini.
From India, Mumbai
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If gratuity was a part of your CTC, which is actually an Annual Pay Package, and you have not completed 5 years, then this is a kind of minor fraud for the reasons cited below.
1. You have not completed 5 years, and yet the company is "deducting" funds from your annual pay package (CTC) towards this component by terming it as "Gratuity" in contravention of the Payment of Gratuity Act 1972.
2. You have not physically received this amount in your salary/annual payment, and this component has been retained by the management.
3. Gratuity is a statutory requirement necessitated by PGA 1972 and is termed as a "Terminal Benefit". As such, this should have no bearing on your Annual Salary during the course of your employment.
4. Most of all, until the completion of 5 years (of the employee), the company does not have any statutory adherence requirement of Gratuity, and hence mentioning this in your CTC before the 5-year period should be termed as illegitimate.
Since the amount has been deducted (not paid to you) annually from the CTC, should you leave before the completion of 5 years, you should be able to demand this back as an Ex Gratia Payment.
The company tends to include all costs that it incurs on the employee in the CTC. However, during the first 5 years, there is no cost that the company will incur due to the PGA 1972. My suggestion, therefore, to HR Managers and heads is to keep Gratuity out of the CTC for the first 5 years. In the fifth year, you could include the component using the following calculation to cover the Cost to the company:
Gratuity = Current basic x 15 x 5 / 26
wherein 5 is the number of years worked.
In the subsequent years, the formula can be returned to the one recommended in the PGA 1972.
From India, Pune
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1. You have not completed 5 years, and yet the company is "deducting" funds from your annual pay package (CTC) towards this component by terming it as "Gratuity" in contravention of the Payment of Gratuity Act 1972.
2. You have not physically received this amount in your salary/annual payment, and this component has been retained by the management.
3. Gratuity is a statutory requirement necessitated by PGA 1972 and is termed as a "Terminal Benefit". As such, this should have no bearing on your Annual Salary during the course of your employment.
4. Most of all, until the completion of 5 years (of the employee), the company does not have any statutory adherence requirement of Gratuity, and hence mentioning this in your CTC before the 5-year period should be termed as illegitimate.
Since the amount has been deducted (not paid to you) annually from the CTC, should you leave before the completion of 5 years, you should be able to demand this back as an Ex Gratia Payment.
The company tends to include all costs that it incurs on the employee in the CTC. However, during the first 5 years, there is no cost that the company will incur due to the PGA 1972. My suggestion, therefore, to HR Managers and heads is to keep Gratuity out of the CTC for the first 5 years. In the fifth year, you could include the component using the following calculation to cover the Cost to the company:
Gratuity = Current basic x 15 x 5 / 26
wherein 5 is the number of years worked.
In the subsequent years, the formula can be returned to the one recommended in the PGA 1972.
From India, Pune
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But if the company gives you the offer letter with gratuity deductions from the CTC. How should we negotiate?
From India, Madras
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From India, Madras
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Need to understand how a company would make provisions for the payment of gratuity in case an employee completes 5 years of service. Suppose the company does not include gratuity for the first 5 years in his/her CTC, and from the 6th year onwards, once gratuity is made a part of CTC, what would be the formula for calculation on a monthly basis.
Looking forward to my HR friends to answer such an interesting topic. Special thanks to employeeX for bringing up such an issue.
Regards, R K Pandey
From India, Lucknow
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Looking forward to my HR friends to answer such an interesting topic. Special thanks to employeeX for bringing up such an issue.
Regards, R K Pandey
From India, Lucknow
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It is a wrong impression that gratuity is payable only if Basic+D.A. is < Rs. 10,000/-. In fact, the Act was amended long ago, and gratuity is payable to all irrespective of post or salary, provided that other conditions of eligibility are satisfied. Payment of gratuity being a contingent liability, there is nothing wrong if that is considered as part of C.T.C.
From India, Pune
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From India, Pune
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Dear All,
First of all, there is no ceiling that gratuity is limited to Basic + DA Rs. 10,000/-. It is to be paid to all the employees irrespective of any basic + DA ceiling. However, PGA says the maximum gratuity that can be paid to an individual is Rs. 350,000/-.
Regarding bringing in gratuity in CTC, normally it is not reflected in the App Orders issued by the company. All the costs incurred by the company by employing the person come into CTC, not necessarily only Gratuity. Since gross payment and other statutory deductions are only reflected as CTC in AO, one has no right to claim the gratuity if he/she resigns before 4 years 8 months.
Hope everyone would agree with this.
Regds
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First of all, there is no ceiling that gratuity is limited to Basic + DA Rs. 10,000/-. It is to be paid to all the employees irrespective of any basic + DA ceiling. However, PGA says the maximum gratuity that can be paid to an individual is Rs. 350,000/-.
Regarding bringing in gratuity in CTC, normally it is not reflected in the App Orders issued by the company. All the costs incurred by the company by employing the person come into CTC, not necessarily only Gratuity. Since gross payment and other statutory deductions are only reflected as CTC in AO, one has no right to claim the gratuity if he/she resigns before 4 years 8 months.
Hope everyone would agree with this.
Regds
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I agree on the Rs 10,000 bit. However, there are many aspects that are considered in the CTC.
First of all, most MNCs (and I'm sure every other industry too) have 2 CTC figures:
a) One that is declared to the employee and includes his salary, perks, and other reimbursable components.
b) An internal CTC that considers many other items that are not declared but are incurred as a result of hiring the employee. These may range from Uniform Expenses, safety equipment (shoes, eye protection, masks, and consumables), water per person per month, electricity, assets like desktops, software licenses, file storage space, furniture, power consumption, food allowances, tea, coffee, and biscuits. This CTC is exclusive to HR and Finance and not disclosed. This goes towards budgeting for operational costs.
Now, since gratuity is not reimbursable to the employee on an annual basis and, from the employee's perspective, is only a "terminal" benefit, mention of this as a one-liner in the Appointment letter would be sufficient, thereby indicating the 5-year period. Inclusion of the same in the annual declared CTC and specifically before the completion of 5 years only raises confusion. This expense should be left out of the declared CTC. This would avoid confusion and be ethically right for the employee.
Items in CTC are reimbursable to the employee annually (annual financial statement closure). If a component of Gratuity is added in the CTC of the employee who has not completed 5 years, it means that:
a) This amount is not being paid to him and is treated as a deduction.
b) If the employee does not complete 5 years, the amount should be paid back to him as an ex-gratia amount notwithstanding the Gratuity act as the Gratuity act is not applicable to him. This is ethical because the amount is actually due to the employee by way of annual deductions from his CTC.
However, if Gratuity is not mentioned in the employee's CTC, he has no right to demand that amount as a terminal benefit until the completion of 5 continuous years of service.
These are my opinions, and I hope someone who is proficient in labor law will share my views.
From India, Pune
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First of all, most MNCs (and I'm sure every other industry too) have 2 CTC figures:
a) One that is declared to the employee and includes his salary, perks, and other reimbursable components.
b) An internal CTC that considers many other items that are not declared but are incurred as a result of hiring the employee. These may range from Uniform Expenses, safety equipment (shoes, eye protection, masks, and consumables), water per person per month, electricity, assets like desktops, software licenses, file storage space, furniture, power consumption, food allowances, tea, coffee, and biscuits. This CTC is exclusive to HR and Finance and not disclosed. This goes towards budgeting for operational costs.
Now, since gratuity is not reimbursable to the employee on an annual basis and, from the employee's perspective, is only a "terminal" benefit, mention of this as a one-liner in the Appointment letter would be sufficient, thereby indicating the 5-year period. Inclusion of the same in the annual declared CTC and specifically before the completion of 5 years only raises confusion. This expense should be left out of the declared CTC. This would avoid confusion and be ethically right for the employee.
Items in CTC are reimbursable to the employee annually (annual financial statement closure). If a component of Gratuity is added in the CTC of the employee who has not completed 5 years, it means that:
a) This amount is not being paid to him and is treated as a deduction.
b) If the employee does not complete 5 years, the amount should be paid back to him as an ex-gratia amount notwithstanding the Gratuity act as the Gratuity act is not applicable to him. This is ethical because the amount is actually due to the employee by way of annual deductions from his CTC.
However, if Gratuity is not mentioned in the employee's CTC, he has no right to demand that amount as a terminal benefit until the completion of 5 continuous years of service.
These are my opinions, and I hope someone who is proficient in labor law will share my views.
From India, Pune
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This point had been raised earlier in this forum, and clarification was given. You may like to refer to the same. If the employee is leaving before completion of five years, he is entitled to receive the entire amount deducted by the employer.
Cyril
From India, Nagpur
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Cyril
From India, Nagpur
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Thanks for clarifying it, Cyril. However, at the time of posting, I was unable to find a similar post that decisively addressed this subject. Most of them concentrated on the applicability of the same when the employee has worked for under 5 years. None of them were specific to the annual deduction of Gratuity from the employee's CTC from Year 1.
From India, Pune
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From India, Pune
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I am showing these comments to my HR manager, but he is saying that this is a company policy. Please tell me what I can do. I am also telling him that according to our offer letter and salary slip, we can take him to court. He says that it is not possible because it is a part of CTC.
I want to know if there is any law that can help us file a case against the company if they do not reimburse our gratuity amount upon leaving or termination.
From India, Ghaziabad
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I want to know if there is any law that can help us file a case against the company if they do not reimburse our gratuity amount upon leaving or termination.
From India, Ghaziabad
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Hi,
This issue was raised in this forum, and we had given our opinion. It has been rightly advised that if the contribution to the payment of gratuity is being shown in CTC and the employee quits before the eligibility period of five years, the amount so deducted must be refunded by the employer. However, if the employer incorporates a clause "subject to eligibility under the Payment of Gratuity Act," then the employee may not be able to claim this amount. In this case, the employer can take a plea that while finalizing the package, this was made clear to the employee, i.e., he will be entitled to the benefit on completion of the eligibility period of 5 years. This is based on our discussions with the Counsel.
Cyril
From India, Nagpur
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This issue was raised in this forum, and we had given our opinion. It has been rightly advised that if the contribution to the payment of gratuity is being shown in CTC and the employee quits before the eligibility period of five years, the amount so deducted must be refunded by the employer. However, if the employer incorporates a clause "subject to eligibility under the Payment of Gratuity Act," then the employee may not be able to claim this amount. In this case, the employer can take a plea that while finalizing the package, this was made clear to the employee, i.e., he will be entitled to the benefit on completion of the eligibility period of 5 years. This is based on our discussions with the Counsel.
Cyril
From India, Nagpur
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There is nothing wrong in showing the gratuity component in CTC provided the employee is informed of the same prior to adding this as a component in CTC. This will enable the employee to bargain about his pay to his advantage. In such circumstances, adding the Gratuity component in CTC is fair.
The other ethical and fair way is to pay the gratuity component in case the employee leaves the employment before completing the eligibility period.
Nowadays, many employers are taking group gratuity policies. Care should be taken to incorporate relevant clauses/conditions to pay gratuity even if the employee is not eligible to receive gratuity upon leaving the service if gratuity is shown as part of CTC.
From India, Hyderabad
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The other ethical and fair way is to pay the gratuity component in case the employee leaves the employment before completing the eligibility period.
Nowadays, many employers are taking group gratuity policies. Care should be taken to incorporate relevant clauses/conditions to pay gratuity even if the employee is not eligible to receive gratuity upon leaving the service if gratuity is shown as part of CTC.
From India, Hyderabad
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The current concept of CTC made everything clear. It is the total cost for the company with reference to the recruited employee. Gratuity is one part of it. When an employee leaves the company before becoming eligible for Gratuity, the company does not need to provide the amount shown as part of CTC to the departing employee.
It is simply a concept. As accounts are prepared under the "Going Concern Aspect," it is a concept designed to demonstrate to employees the cost to the company. In reality, nothing is deducted from the payable amount. Therefore, an employee claiming it back is not appropriate. It is not advisable for the company to reimburse that fictitious amount simply shown as part of CTC; it rightfully belongs to the employee only when they remain in service.
From India, Hyderabad
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It is simply a concept. As accounts are prepared under the "Going Concern Aspect," it is a concept designed to demonstrate to employees the cost to the company. In reality, nothing is deducted from the payable amount. Therefore, an employee claiming it back is not appropriate. It is not advisable for the company to reimburse that fictitious amount simply shown as part of CTC; it rightfully belongs to the employee only when they remain in service.
From India, Hyderabad
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Dear VSChalla,
It's simple that until gratuity is not paid, how would a company incur the cost or how would it be a cost to the company? It's just that the employee is shown a big amount, but in actuality, it is gross-gratuity (and others) that he is getting. Maybe it helps the company in getting tax benefits, but it confuses a lot of employees in reference to their tax planning.
Somewhere above, I was reading that the employer needs to submit this amount to LIC. Does LIC keep it for no interest giving on it? And if an employee leaves before the 5 years, what happens to that money deposited in the employee's name? Whether the employer is refunded, and if this is the case, it should be the entitlement of the employee, not the employer. What do you all say?
Please let me know your thoughts on this matter.
From India, Vadodara
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It's simple that until gratuity is not paid, how would a company incur the cost or how would it be a cost to the company? It's just that the employee is shown a big amount, but in actuality, it is gross-gratuity (and others) that he is getting. Maybe it helps the company in getting tax benefits, but it confuses a lot of employees in reference to their tax planning.
Somewhere above, I was reading that the employer needs to submit this amount to LIC. Does LIC keep it for no interest giving on it? And if an employee leaves before the 5 years, what happens to that money deposited in the employee's name? Whether the employer is refunded, and if this is the case, it should be the entitlement of the employee, not the employer. What do you all say?
Please let me know your thoughts on this matter.
From India, Vadodara
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I agree with you, Mahendrasingh. The CTC is an agreement between the employer and the employee. If an amount is specified in the CTC for the first 5 years, the same should be paid to the employee, notwithstanding the Gratuity Act.
From India, Pune
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From India, Pune
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Thank you all,
We have mulled over this issue for a long time and have succeeded in extracting some useful insights. However, I really miss having somebody share practical experience regarding this particular situation.
While understanding legal and labor provisions is important, I believe that sharing practical knowledge would be even more helpful on this forum. In reality, on this issue, the individuals most eager to learn would likely be the victims (i.e., employees) rather than others. Therefore, speaking in a practical sense would be more beneficial.
I encourage people to provide further clarification by sharing practical cases rather than solely focusing on legal provisions. It may be beneficial to briefly mention the legal concepts, but delving too deeply into them could be overwhelming for many.
In a previous discussion, Mr. VSChalla explained why CTC generally includes gratuity components. He stated that "It is a concept only. As Accounts are prepared as 'Going Concern Aspect,' it is a concept just to show the employee that it would be a cost to the company."
I agree with him that it would indeed be a cost to the company. From this perspective, it becomes evident that since the company anticipates this future cost, it may include gratuity as a deductible amount in the CTC mentioned in the appointment letters, essentially collecting this sum in advance from the employee. This practice can be justified.
However, another aspect that we must acknowledge is that the employer deposits this amount with LIC, indicating an actual fund transfer between the company and LIC on behalf of the employee. When an employee completes five years of service, the same amount is refunded to them from the gratuity fund. Therefore, it is justifiable to include this in the CTC and deduct it in advance.
But what happens if an employee leaves before completing five years, and the deducted amount is not refunded? It is important to recognize that a gratuity component is deducted from the employee's CTC/payable amount and managed by LIC. Can we simply dismiss this as a concept with no real value that the employee cannot claim? When an amount is deposited to LIC under the employee's name for gratuity, and there is a genuine fund transfer, how can it be considered merely a concept? Why is this conceptual aspect necessary in the CTC if it does not materialize physically?
Since employees are shown the actual cost to the company that they are paid, why include such an abstract component in their CTC? If it is included, should it not be claimable by the employee?
If the company were to retrieve that fund, it would indeed be fraudulent.
I would greatly appreciate it if someone could share their practical experience on this specific situation, including insights on the ex gratia payment procedure.
Thank you
From India, Vadodara
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We have mulled over this issue for a long time and have succeeded in extracting some useful insights. However, I really miss having somebody share practical experience regarding this particular situation.
While understanding legal and labor provisions is important, I believe that sharing practical knowledge would be even more helpful on this forum. In reality, on this issue, the individuals most eager to learn would likely be the victims (i.e., employees) rather than others. Therefore, speaking in a practical sense would be more beneficial.
I encourage people to provide further clarification by sharing practical cases rather than solely focusing on legal provisions. It may be beneficial to briefly mention the legal concepts, but delving too deeply into them could be overwhelming for many.
In a previous discussion, Mr. VSChalla explained why CTC generally includes gratuity components. He stated that "It is a concept only. As Accounts are prepared as 'Going Concern Aspect,' it is a concept just to show the employee that it would be a cost to the company."
I agree with him that it would indeed be a cost to the company. From this perspective, it becomes evident that since the company anticipates this future cost, it may include gratuity as a deductible amount in the CTC mentioned in the appointment letters, essentially collecting this sum in advance from the employee. This practice can be justified.
However, another aspect that we must acknowledge is that the employer deposits this amount with LIC, indicating an actual fund transfer between the company and LIC on behalf of the employee. When an employee completes five years of service, the same amount is refunded to them from the gratuity fund. Therefore, it is justifiable to include this in the CTC and deduct it in advance.
But what happens if an employee leaves before completing five years, and the deducted amount is not refunded? It is important to recognize that a gratuity component is deducted from the employee's CTC/payable amount and managed by LIC. Can we simply dismiss this as a concept with no real value that the employee cannot claim? When an amount is deposited to LIC under the employee's name for gratuity, and there is a genuine fund transfer, how can it be considered merely a concept? Why is this conceptual aspect necessary in the CTC if it does not materialize physically?
Since employees are shown the actual cost to the company that they are paid, why include such an abstract component in their CTC? If it is included, should it not be claimable by the employee?
If the company were to retrieve that fund, it would indeed be fraudulent.
I would greatly appreciate it if someone could share their practical experience on this specific situation, including insights on the ex gratia payment procedure.
Thank you
From India, Vadodara
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Dear EmployeeX,
Thanks for the detailed post about Gratuity. My organization has completed six years in the current year. From last year, we have started making provisions for Gratuity just because a few employees have completed 5 years in the organization. From the current financial year, we are planning to add the gratuity amount to Employee CTC.
If I go with the formula specified by you, "Gratuity = Current basic X 15 X 5 / 26," then the gratuity component from the total CTC comes to very high, for which employees will not agree at all. If we calculate only for the current year, then the overall liability for the past year needs to be borne by the employer. Is there any suggestion by which we can come out with some fair result that should not hamper the employee as well as the employer?
Thanks
From India, Mumbai
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Thanks for the detailed post about Gratuity. My organization has completed six years in the current year. From last year, we have started making provisions for Gratuity just because a few employees have completed 5 years in the organization. From the current financial year, we are planning to add the gratuity amount to Employee CTC.
If I go with the formula specified by you, "Gratuity = Current basic X 15 X 5 / 26," then the gratuity component from the total CTC comes to very high, for which employees will not agree at all. If we calculate only for the current year, then the overall liability for the past year needs to be borne by the employer. Is there any suggestion by which we can come out with some fair result that should not hamper the employee as well as the employer?
Thanks
From India, Mumbai
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Gratuity-Leave calculation on CTC-Rev..xls