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Gratuity is paid by the employer to their employees where an employee worked minimum of 5 years with them as part of a retirement/resigning benefit stated by the law/ACT. Deducting from employees GROSS salary is not a fair one. But they can show it in CTC as part of the employer's contribution to an employee. So do check with them, its well and good if it is a part of CTC or if it is on gross, they cant do so.
As per my view this is not a fair practice by the employer, it is up to you whether you accept it or not.
But ideally, a company should not add or deduct any amount from the salary as gratuity and good companies are following the same.
CTC means cost to the company and not cost to the employee. Its always better to include all direct and indirect cost in the CTC for better understanding, Today everybody is well aware of salary break up given by an employer. We cant just like that rate a company with their CTC workings. Only concern here is if the HR person detailed the breakup after of before the offer, then there wont be any doubts/queries raised because of this. So, its not harm to include anything with a briefing to the employee.
As I stated earlier Gratuity cannot be included in CTC Component, because Gratuity is paid as a gratitude towards the employee for his continuous service rendered to the employer i.e. loyalty to the employer it is more or less like a tip for the service rendered. If we calculate Gratuity as a part of CTC what if an employee leaves the company within a span of 2-3 years.
With regards to including all direct and indirect cost in the CTC, why leaves, weekly offs and holidays are not counted in monetary terms and included in CTC component. It is also a cost to the employer isn't it.
My conception may be wrong, seniors please advice
The concept of CTC has been well explained by Mr.Christopher. The Gross salary is the salary payable to the employee on a monthly basis. Thereafter LTA, Medical reimbursement, Bonus etc are payable to the employee as per the terms and conditions of employment and statutory provisions.
However, the employer on his part has to make provisions for his liability in respect of employees working in the organisation. With this in view components such as Gratuity, PF, Superannuation, Cost of Uniform, Canteen facility, Transport facility, Premium paid towards Mediclaim, Personal Accident Policy etc are added and shown as Cost To Company (CTC).
In other words if the employee were to join some other organisation which does not
a) Offer PF coverage (by applying the wage ceiling available under the act),
b) have Superannuation benefits (Generally 15% of the employees basic salary is invested in LIC's superannuation scheme, from which the employee gets benefits on his superannuation or separation from service after fulfilling conditions laid down under the scheme)
c) provide Uniform (If the company does not provide uniform the employee needs to buy shirting & suiting for his daily wear to the organisation)
d) have canteen facility (if there is no canteen the employee has to make his own food arrangements)
e) have Transport facility (if there is no transport facility he has to commute to the place of work at his own expense)
f) have a Mediclaim facility (either the employee & his family are not covered or the employee has to pay premium from his pocket)
g) have a Personal Accident Policy (The employee may loose the weekly benefit available under the Policy and the compensation payable to his dependents in the event of an unfortunate death of the employee)
Either the employee has to spend additionally or does not get accrued benefits from the employer.
Weekly off, Holidays etc are offered by almost all companies and hence comparison may not be relevant. For the employee to make an apple to apple comparison CTC is shown by employers for him to draw his own conclusion
This is the reason why companies show this as part of CTC to indicate to the candidates the benefits in addition to the salary being paid. Some companies even show variable pay packages such as performance incentives as part of CTC. If the employee/ company performs he gets the incentive to the extent of performance.
In this context showing perquisites/ benefits as part of CTC is not uncommon among employers.
According to my view facilities like Canteen/Uniforms/Medical etc. cannot be counted in CTC, as such Medical is a statutory requirement which the employer has to provide as per the relevant statutes. If an employee who is Jain/Swaminarayan would not prefer to take the food available in the canteen, he may bring tiffin, would you force him to take the canteen facility ?. Uniform is provided to show the uniformity among the employees, I have a lady candidate who belongs to Muslim community and wear her burqa she refused to wear the uniform which is against her religious ethics, should we force her to wear the uniform or should we terminate her for just not wearing the uniform. These all facilities provided by any company cannot be forced to the employee and thus cannot be part of CTC.
With regards to Gratuity it is given at the time of leaving the organization and given as a gesture, which we are not sure whether the employee will be with the company for not less than 5 years.
Last but not the least it was not to hurt the sentiments of either Mr. Christopher or any HR fraternity but have revealed my views, which is not necessarily to be accepted by anyone.
Gratuity Calculation = [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26
If I consider even your DA to be nil, then also at the end of 5 years you are entitled to Rs 29,795/- as gratuity.
The organisation is deducting Rs 497 per month from your salary. So, if you calculate 497 x 12 x 5, it comes to Rs 29,820 !!!!!!!!
For the first time in my life am I hearing of such abuse of a good HR practice of rewarding an employee for his loyalty.
Do consider a number of times before considering the offer - this may just be the tip of an iceberg of Hr manipulation.
Dr Parveen Ahmed Alam
What is CTC?
If i were to include Gratuity in CTC, is not required to be given to employee, if he was to resign by the end 3rd year?
Will the employer account this as his income on resignation of emloyee, as he was already expenses it?
Indicating that so much of Gratuity is payable if emloyee were to wor for 5 years (Approx) is fine.
Gratuity is calculated on last salary drawn, how can anyone comute it before 5th year??
Gratuity is a statutory payment and all employers are required to pay it, if an employee complete required period of service, then how this changes comparision?
These are all the best practices which all companies wish to follow and it is sucessful only with the combined effort of all the employees and management.
- Chakradhar Reddy.
if yes, what entry is passed on completion of 4 year 8th month? All amounts including prior eriod expenses accounted in books?
How about accounting princiles, accrual policy, accounting standard compliances etc?
Simplest Definition of Gratuity - A sum of money paid to an employee as a reward in the form of money at the end of a period of employment for his past services given as a gratitude towards the services rendered.
Now to earn the gratuity according to the Gratuity Act, specifies that one gets to earn the gratuity only after completing 5 years of continuous service in any company, and this goes accrued into the employees account till the time he/she changes the job or is retired. In any case, the gratuity account has to be settled on the departure of the employee.
The calculation is half the basic salary (at the time of departure/quitting the company due to change of job or retiring) multiplied by the number of years of service
As Mr. Christopher has pointed out that it cannot be deducted from the Gross Salary but can be adjusted in CTC, and that's the practice that is followed by most IT Companies. I too strongly feel that this is not the right practice, and it should not be apportioned in CTC as a component, because logically it should be disbursed from the company of the employer. It is for this reason several companies have formed a 'trust' and the members of the trust work on a certain base amount that is set aside by the company to enable the gratuity disbursement. However, in recent times LIC has a group Gratuity Insurance, to which companies contribute a certain some of money as a premium. The base for operation too is that it should have a minimum of 100 members only then the policy can be made operational, as per the servicing viability of the insurance company.
What I have given here is the broad policy, if one is really interested, one can query on Google both on the Gratuity Act and also on the LIC's portal on specifics of the LIC's Group Gratuity Scheme.
Finally when you join a company and it apportions gratuity in your CTC, I'm afraid you have no option at all. You have to take it without dispute, else you can refuse to join that company. There is no alternative whatsoever.
The realities are quiet different from a text book situation.
Every company adds as many things as possible to CTC.
Many companies add training cost. Does it come to the employee ? No way. But its still added as a practice (check any CTC given in the MBA colleges)
Hongkong Bank used to add to the CTC discount on housing loan, which the employee cant get in any case till he works for 5 years
(not sure if the practice is still alive).
So CTC is made to look high so that the employees are attracted to it.
Any smart employee will ignore all those that he is not actually getting. In fact, employees mostly focus at take home amounts only.
Ofcourse, i would like to know from the original poster as to whether he was referring to the CTC or was he referring to what is appearing on his salary slip
The company is well within its right to show Gratuity as a component in CTC . Components like Gratuity, PF, Superannuation, Cost of Uniform, Canteen facility, Transport facility, Premium paid towards Mediclaim, Personal Accident Policy etc may be shown as a part of the employer's contribution to an employee. These components are generally negotiable.
Gratuity becomes cost only after completion of minimum 4 year 10 month's service. There is no way one can negotiate gratuity component with employer. Even employer himself can calculate approximate gratuity only on 5th year. Thats why accounting standard adopts actuary valuations for making provisions. All other calculations are only wild assumptions.
I think, any component, by whatever name you call, once included as part of CTC, that is legally due and payable (directly or indirectly) to employee and has to be paid.
If gratuity is shown as part of CTC and emplyee resigns after, say, 2 years, will this componet payable to him???
But if we do not know whether person will be staying in company for at least 5 years to avail gratuity, how the calculations goes for gratuity from the day one.
Sir, can you please explain on how companies calculate gratuity to add in ctc as employer contribution for an employee. Is it on pro-rata basis??
Gratuity provisions are made by the employer and added as part of CTC as follows.
If the Wages were Rs.5000/-, the gratuity calculation will be Rs.5000 X 15/26 = Rs.2885/ annum this is added to the CTC per annum and this is approximately equivalent to 4.80% of the wages earned by the employee. Some companies have a Group Gratuity scheme with LIC of India and pay the Gratuity liability based on an actuarial valuation furnished by LIC. If an employee who is eligible to receive Gratuity leaves the company the company works out the liability and submits an application to LIC which in turn releases a cheque favouring the Group Gratuity fund of the company. The company releases the cheque to the employee thereafter.