Korgaonkar K A
Ba,llb,mpm,dir&pm,dll&lw,d.cyber
Soumik1570
Calcutta University
K C S Kutty
Labour Laws
+4 Others

Thread Started by #nayanadube

Dear Seniors
I have a query.
Is the gratuity amount which is paid after a completion of 5 years to a employee, is deducted from the ctc of the employee to make provision for payment of gratuity?
In my case, my employer has deducted certain amount towards gratuity from my ctc for the past 4 years and four months.
Is it right or wrong? If it is wrong, then how would I be able to claim it?
Kindly reply
Nayana
23rd March 2013 From India, Mumbai
Hi Nayana,
Please be understand that Gratuity is not deducted from YOUR CTC. The term CTC is no longer related to the employee. Hope, you aware, CTC is the "Cost to the Company". Hence, the owner for the term "CTC" is the Employer.
Employer is using the term called "CTC" wanted to know the total cost involved for engaging a employee in a particular designation or role. Hence, to understand the total cost involved, they can add, whatever the cost they are spending from the packet for the particular designation.
Hence, your employer is showing the cost in the heading of Gratuity in the CTC.
In case, you are completing 5 years of service, then the cost will be given to you.
Regards,
SDK
24th March 2013 From India, Madurai
Dear Nayana ji,
CTC is a Cost to the company on your employment. The cost towards your gratuity is incurred by the company since your joining. Company needs to make the provision for your gratuity from first year itself of your service. Therefore company consider this cost from beginning itself. There is no wrong. Mind well, as SDK said that the CTC is not your Salary. CTC is the concept you accept at the time of negotiating your salary.
However I suggest employers to write a foot note below the CTC structure stating that gratuity is payable to employee on completion of 5 years service as per POG Act. So that employee gets clarity at the time of joining itself.
24th March 2013 From India, Mumbai
Dear Nayna
Rightly said by other members, CTC is "cost incurred by a company towards engaging /retaining an employee". Different companies have different components. CTC may include all monetary and non monetary expenses and investments that a company makes on an employee.
In your case..it is necessary for you to understand that it is only notional deduction (if it is shown in pay slip). It could be explained as that your company invests that much amount on monthly basis towards your Gratuity, which company is liable to pay when you become eligible.
Only apprehension or catch is what if an employee leaves before completion of Five years of service? Regards
Shailesh Parikh
Vadidara, Gujarat
99 98 97 10 65
25th March 2013 From India, Mumbai
But we have to all mind it that 5 years of service is not required when the employee got dead or permenent disbalement from the service due to accident or dicease.
28th March 2013 From India, Angul
Pl clarify whether any deduction is made from your Monthly Salary towards contribution to Gratuity ? If so what is the amount deducted per month as per your Pay Slip ? K C S Kutty
28th March 2013 From India, Madras
companies do deduct it from ctc, but this is not right approach, or a good company hr approach.

Please refer to payment of wages act, and first see what is deductions called, and the legality of deducting any sum from the salary, it's maximum percentage, and if under coperatives then how much..this will give you a basic idea...

Now deductions are accumulated for the fund, which must be registered fund, but as such gp fund is no such funds where the deductions can be stored, its not legal.

And you dont have to think rocket science, just imagine, how can an employer ascertain what will be your last pay's basic+Da, on which the gratuity sums would be deducted. and funny things is , suppose your gratuity is less than 10lkhs, and you dont have to pay the taxes, thats what statues say, but see if by adding such monthly gratuity amount to CTC, you somehow fall under taxable income, then you will have to pay tax each year , till you resign and finally get the gratuity..and the employer will seek tax relief by showing different heads of such unlawful deductions..thats exploitation of employees.
28th March 2013 From India, Calcutta
With reference to Gratuity, I have a caution. See that collected amount is deposited by getting a number. In case it is not done, during the period of service and death of the candidate, the family would be deprived from FP family pension.
29th March 2013 From India, Nellore
What is the relationship between GRATUITY and FP family Pension ?
29th March 2013 From India, Madras
What is the relationship between Gratuity and FP family pension ? In the above post it is mentioned as under.
"With reference to Gratuity, I have a caution. See that collected amount is deposited by getting a number. In case it is not done, during the period of service and death of the candidate, the family would be deprived from FP family pension"
29th March 2013 From India, Madras
Perfect and convincing answer, Koregaonkarji. The difference between salary and CTC is to be understood.
29th March 2013 From India, Madras
Dear Kutty ji,
Thank you very much for your postings. I also was thinking to write appropriate reply. I did it in some other posts earlier. In many posts even I appealed the members to think before posting any thing. We are all HR professionals, we should keep it in mind before posting. Many people across the world read our postings. Just think what impression they carry with them about we HR Professionals. Some topics like gratuity, CTC, Bonus etc. are repeatedly discussed in this forum but still we are not able to understand it. If we don't understand, how we can convince our stake holders?
My intention is not to hurt any one but to educate them.
29th March 2013 From India, Mumbai
Thank you Koregaonkar ji. We expect such precise, convincing upto the point answers from you.
It is a good learning experience. It helps to update and learn. Let's share whatever knowledge we have.
30th March 2013 From India, Madras
Benefits of Setting up An Approved Gratuity Trust by the Companies
Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal. It means, Gratuity amount is determined only on the monthly terminal wages of the employee on his exit from the Company after completion of 5 years of Service. The cost is to be borne by the Company and not by an employee. hence, unlike other fringe benefits (i.e. Medical Insurance, Term Insurance & Accidental Insurance) it can not be part of CTC. 
To understand this, let us take an Example,
Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.
Now Gratuity Payments for next 5 years will be :-
On Completion of 1 Yr - (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs - (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs - (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs - (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs - (15/26)*41,873*5 = 1,20,788/-
Now for making the payment of gratuity, Company has 2 options :
(i) Pay as you go option - Where company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.
Expected Tax Benefit calculation in case of "Pay as you Go Option" :-
For Provision of 1st Yr - NIL
For Provision of 2nd Yr - NIL
For Provision of 3rd Yr - NIL
For Provision of 4th Yr - NIL
For Payment on 5th Yr - 1,20,788/-
In this case company, Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-. 
(ii) Funding Option - In this option, Company decides to Setup an Approved Gratuity Trust . The Investment of Company is either "Self Managed " or “ Managed by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.
Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
In this case, Mr. A will get gratuity of Rs. 1,20,788/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,74,536/- for annual contribution made by him in previous 5 years. 
To get more clarity on the above example, let us take some more questions about the possibilities/event that may happen on or after completion of 5 years and their impact on the Company in case of "Funding Option" :-
Question 1. If employee died during 1st to 4th year before completion of 5th year, then what would be the benefit for Company and employee's Nominee ?
Answer 1. If employees died after 1 yr, 2nd, 3rd and 4th year but before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
The company will get the Tax for the contribution made by him before the date of death of the employee as stated above and employee's nominee will get following Gratuity Payments from the Trust along with a future service gratuity subject to certain limits as defined by the Insurance Company whilst taking Group Gratuity Scheme from the Insurance Company.
Question 2. If the employee resigns during 1st to 4th year and before completion of 5th year, then what would be the benefit for Company and employee?
Answer 2. If employees resign during 1st to 4th year and before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
and the employee will not get following Gratuity Payment from the Trust. The amount contributed by the company and interest accrued will be used by the trust for future payments of Gratuity to other employees of the company. 
Question 3. If the employee resigns/retires after completion of 5th year, then what would be the benefit for Company and employee?
Answer 3. If employees resigns/retires during after completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr - 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr - 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr - 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr - 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr - 38,067*12*0.833 = 41,857/-
Total Contribution in 5 years...........................= Rs.1,74,536/-
and the employee will get Rs. 1,20,788/- as Gratuity Payment from the Trust. Since the company has contributed an amount in the trust is more then what is payable after 5th year so the surplus amount and interest accrued on the contributions of will be used by the trust for payment to the other employees.
From above examples of "Pay as you go Option" and "Funding Option," it is clear that Gratuity cannot be a part of CTC but it is a legal obligation which is borne by the Company on exit of the employee.
The Company may have an option to set up a Gratuity Trust and make an annual contribution in the "Irrevocable Trust" so that he can avail the tax benefits Section 36(1)(v) of the IT Act 1961 and will have a Corpus in "Irrevocable Trust" which will be exclusively used by the Trustees to meet with Company obligation towards Gratuity Payments.
You may avail our Consulting Services for Setup of Gratuity Trust Fund, Employee Benefits Plans Restructuring as per the rules and regulations of the Act/Acts (i.e. Gratuity, Leave Encashment & Long Service Awards) & Retention Schemes like Employer-Employee Scheme for your highly paid employees.
With Regards
Tikaram Chaudhary
Group Gratuity Trust Fund & Group Insurance (Retention Schemes) Consultant
(Experienced Consultant with 10 years of exposure in assessment/valuations of Employees Benefit Liabilities specially Gratuity/Leave Encashment Liabilities & Retention Schemes)
Email Id: gratuityconsultant@gmail.com
Mobile Number: 9211637063
For more details about us visit our blog at www.gratuityconsultant.blogspot.com
25th February 2019 From India, Delhi
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