Hr Officer
Asst Manager - Hr
R K Pandey
Rama Bs
Kale Smita
+7 Others

Isnt 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 are above Rs. 10000, 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 employees 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 last 3 years, his/her Basic +DA was from the start well above Rs. 10000 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 my many honest companies to revert the amount via a Ex Gratia payment?
6th October 2008 From India, Pune
you mean to say if employees leaves with in five years he can ask his gratuity payment made from his CTC?
6th October 2008
Thanks to CITEHR, even my company used to mention gratuity component in CTC and I was also a victim to it, but after forwarding the previous link of CITEHR on the gratuity issue to the director HR and subsequent discussion, they have agreed to remove it from CTC. If it is deducted you have the right to demand it back while leaving prior to completion of 5 years.
7th October 2008 From India, Mumbai
Dear Members,
As the preparation of CTC of any employee is being made by HR personnels only, it is the responsibility of the HR professionals to not to misguide the management by including gratuity component in CTC. Therefore it is the prime responsibility of the management to consider the case and prepare CTC without gratuity component as the employee is not eligible before five years.
In my view, as per the Payment of Grauity Act the gratuity fund is to be maintained with LIC and from the first year itself the share of grauity on behalf of employee is to be paid to LIC and the management feels that it the cost involved as part of CTC. But they should not treat like this.
M Srinivas
Asst Manager - HR
Ramky Group of Companies
7th October 2008 From India, Hyderabad
Dear Sir,
What about those employees who leave the Company within 3 years and still gratuity is a part of their CTC, aren't they also eligible to get the money because it's a part of their CTC ? Please reply.
Thanks and regards,
8th October 2008 From India, Mumbai
if gratuity was a part of your CTC which is actually and Annual Pay Package and you have not completed 5 years than this is a kind of a 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 adherance 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 so as 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 recomended in the PGA 1972
8th October 2008 From India, Pune
But if the company gives you the offer letter with gratuity deductions from the CTC. How should we negotiate?
8th October 2008 From India, Madras
Need to understand how would compnay make the provision for payment of gratuity in case any employee completes 5 years of service.
Suppose company is not including gratuity for first 5 years in his / her CTC and 6th year onwards once gratuity is made part of CTC; what would be the formula for calculation on monthly basis.
Looking forward my HR friends to answer on such an interesting topic. Special thanks to employeeX for bringingup such an issue.
R K Pandey
8th October 2008 From India, Lucknow
It is a wrong impression that gratuity is payable only if Basic+D.A.
is<Rs.10000/-.In fact The Act is 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 contingent
liability,there is nothing wrong if that is considered as C.T.C.
8th October 2008 From India, Pune
Dear All,
First of all there is no ceiling that gratuity is limited to Basic + DA Rs. 10000/-. It is to be paid to all the employees irrespective of any basic+Da ceiling. However PGA say the maximum of gratuity that can be paid to an individual is Rs. 350000/-.
Regarding binging in gratuity in CTC, normally it is not reflected in the App Orders that are issued by the company. All the cost incurred by the company by employing the person comes 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 4yrs 8 months.
Hope everyone would agree with this.
9th October 2008
I agree on the Rs 10000 bit. However there are many aspects that are considered in the CTC.

First of all most MNC's (and Im 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 incured 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 storege space, furniture, power consumption, food allowances, tea, coffee and buiscuits. THis CTC is exculsive to HR and Finance and not disclosed. this goes towwards budgeting for operational costs.

Now since gratuity is not reimbursable to the employee on an annual basis and in the employees perspective is only a "terminal" benifit, mention of this as a one liner in the Appointment letter would be sufficient therey indicating the 5 year period. Inclusion of the same in annual declared CTC and specifically before the completion of 5 years only raises confusion. This expenses should be left out of the declared CTC. This would avoid confusion and be ethically right to 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 ex-gratia amount not withstanding the Gratuity act as the Gratuity act is not applicable to him. This is ethical because the amount actually is due to the employee by way of annual deductions from his CTC.

However if Gratuity is not mentioned in the employees CTC, he has no right in demanding that amount as terminal beinfit until the completion of 5 continious year service.

These are my opinions and I hope someone who is profficient in labor law will share my views.
9th October 2008 From India, Pune
This point had been raised earlier in this forum and clarification given. You may like to refer to the same. If the employee is leaving before completion of five years, he is entitled to recieve the entire amount deducted by the employer.
9th October 2008 From India, Nagpur
Thanks for clarifying it Cyril. however at the time of posting I was unable to find a similar post that was decisively on this subject. Most of them concentrated on applicability of the same when the employee has forked for under 5 years. None of them were specific to the annual deduction of Gratuity from the employees CTC from Year 1.
10th October 2008 From India, Pune
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 saying him that according to our offer letter & salary slip we can take him to the court he says that it is not possible because it is a part of CTC.
I want to know that there is any law if company did not remburse our gratuity amount on leaving time / terminated time, which can help us to casefile on company?
5th November 2008 From India, Ghaziabad
This issue was raised in this forum and we had given our opinion.
It has been rightly advised that if the contribution to 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.
11th March 2010 From India, Nagpur
There is nothing wrong in showing 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 in advantage to him/her, In such circumstances adding Gratuity component in ctc is fair.
The other ethical and fair way is to pay the grauity component in case the employee leaves the employment before completing the eligibility period.
Nowadays many employers are taking group gratuity policy.Care to be taken to incorporate relavant clause/condition to pay gratuity even the empoloyee is not elgible to receive gratuity while leaving the service if gratuity is shown as part of ctc.
17th March 2010 From India, Hyderabad
The current concept of CTC made every thing clear. It is total cost for the company with reference to recruited employee. Gratuity is one of it. when an employee leaves company before eligibility of Gratuity, company need not give the amount shown as part of CTC to left employee.
It is a concept only. As Accounts are prepared as " Going Concern Aspect"
it is concept just to show employee that it would be cost to company.
Actually speaking nothing is deducted from the payable amount.So employee claiming it back is not proper. It is not advisable to company to pay back that ficticious amount just shown as part of CTC , and it is property of employee only when he continues to be in service.
10th June 2010 From India, Hyderabad
Dear VSChalla,
Its simple that untill gratuity is not paid, how a company would incur the cost...or how it would be a cost to company...its just that employee is shown big amount but in actual it is gross-gratuity (and others) that he is getting.....may be it helps company in getting tax benefits but confuses a lot to employee in referrence to his/her tax planning.
Somewhere upper i was reading that employer needs to submit this amount to LIC...does LIC keeps it for no interest giving on it & if an employee leaves before the 5 years..what happens to that money deposited in employee's name..whether employer is refunded & if this is the should be the entitlement of employee,not of employer? what do u all say..???
29th June 2010 From India, Vadodara
i agree with you Mahendrasingh. The CTC is an agreement between employer and 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.
13th August 2010 From India, Pune
Thanks All,

We have mulled over this issue for long and gets success in taking some substance out. But i really miss to somebody share practical experience on this particular situation.

Though legal/labour provisions needs to first understand but i think sharing of practical knowledge will help more as on this forum and practically on this issue, more people desirous to hear would be the victims (i mean employee's and less others) and so in that way talking in real sense would be more useful.

I want people add more clearification on this by sharing the practical cases and not legal provisions (may just mention the concept) otherwise it passes over to many heads.

Above, Mr. VSChalla expains why CTC generally includes gratuity components as he says that " It is a concept only. As Accounts are prepared as " Going Concern Aspect" it is concept just to show employee that it would be cost to company.

I am agree with him that it [B]would be a cost to company but from here it also becomes clear that since company thinks that later on it would be a cost to company as company will have to pay that amount, and so keeping that in mind company may design its appointment letters to CTC include gratuity as deductible amount and show to collecting the same in advance from employee.Justifibale.

But another think which is also true and we should all agree with, is that employer deposits this amount with LIC, i mean there is actual fund transfer between company and LIC on behalf of empolyee.

So when employee stays for five years then same is refunded to him in the form of gratuity fund and thus is justifibale to so show in CTC and deduct in advance.

but what if employee leaves before5 years and company has deducted but same is not refunded to employee.

See everybody should agree and it is true that a gratuity component is cut from employee's CTC/payable amount and same is deposited to and managed by LIC, will it justify to just say that it is just a concept shown to employee and does not have real value which employee can not claim. When an amount is deposited to LIC in name of an employee under gratuity and there has been actual fund transfer in his/her name how can it just be a concept. why this concept is required in CTC which never gets physical shape.

Since employee is shown only the real cost to company which he is paid, why such unreal component forms part of his/her CTC, and if forms same should be claimable.

If company gets that fund back that certainly that is a fraud.

I would really appreaciate (as that will help me) if somebody will share practical experiance on this particular situation, including views on procedure of ex gratia payment.

16th August 2010 From India, Vadodara
Dear EmployeeX
Thanks for the details post about Gratuity.
My organization has completed six years in current year. From Last year we have started making provision for Gratuity just because our few employees has completed 5 years in the organization. From the current financial year we are planning to add gratuity amount in to Employee CTC.
If i go with the formula specified by you "Gratuity = Current basic X 15 X 5 / 26" then gratuity component from the total CTC comes to very high for which employee will not get agree at all and if calculate only for current year then the overall liability for the past year need to be bared by employer. Is there any suggestion by which we can come out with some fare result which should not hamper to employee as well to employer.
2nd April 2013 From India, Mumbai
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