As per The Payment of Gratuity Act, 1972, Gratuity is an award which an employer pays out of his gratitude, to an employee for his long and meritorious services, at the time of his retirement, or termination of his services. Payment of gratuity is, however, compulsory for employers, subject to eligibility mentioned in the legislation. One of the compulsory eligibility is – “Continuous Service of FIVE Years”.

By definition, Total Cost to Company (TCTC) means total amount payable to an employee or on behalf of employee, directly or indirectly, in a year. Hence, among all other heads, TCTC includes contribution towards Provident Fund (PF), contribution towards Employees’ State Insurance, payment of bonus, variable component of TCTC (performance linked bonus, if bonus), and contribution towards any other benefits payable to an employee in a year.

Hence, deduction towards Payment of Gratuity is legal or illegal? Gratuity becomes payable, if and only if, an employee completes FIVE years of continuous service with organization. If an employee leaves the organization within FIVE years of joining, he is not paid the Gratuity Amount, even though the amount has been deducted from his CTC and kept aside.

Do you think deduction made from the TCTC of an employee towards payment of gratuity, is legal or illegal? Is it ethical?

You can share your thoughts…

From India, Mumbai

Hi Sanjeev, It is not illegal to include Gratuity in the CTC, as it is an actual cost to the company. Many companies take insurance for Gratuity as well.
From India, Bangalore
There is nothing wrong in including gratuity in the CTC, that an employer can include anything in it including the cost of tea and coffee that an employee will have during office hours, the cost of uniforms that is given and each and every rupee that he spends for the employee. But what is wrong is the purpose or idea behind showing the cost of service of an employee as cost to the company as against the salary cost. This is just to attract people and lure them to accept the offers given by the employer. The employer can put any amount as variable pay and say that if you perform you can earn it, knowing that it is unreasonable and cannot be achieved at all. But the candidate who sells his service would accept it thinking that it is available to him either as part of monthly salary or is easily achievable. Everything goes wrong when time passes.

Gratuity is a real payment but is payable depending upon certain conditions, ie, continuous service of 5 years and the last drawn salary. If these conditions are mentioned, there is no illegality in including the amount in the CTC. But it is not to be deducted from the salary but is paid subject to the above mentioned conditions. I dont think that any company will show this as deduction from the salary in the pay slips. If so, claim it as unauthorized deduction and get the amount refunded immediately.

I do not personally favour the practice of CTC. In my opinion, the price that the employer will pay for the services that each employee gives should be equal to the benefits that the employer gets from these services of the employee. That is why we often ask in a job interview, why should we hire you?, which implies, what benefits would we get from hiring you?. This was ironically expressed by me long back, when the concept of CTC was in its inception stage, which figured to say CTC should be renamed as Benits to Company or BTC. Please follow the link below also.

Madhu.T.K: CTC Vs BTC


From India, Kannur
Hi Friends....I have 8 Yrs of HR experience. Lets share and make HR as successfull for organisation as well as employees.
From India, Hyderabad
Good point for discussion to include Gratuity in Annual CTC offered to new joinee.
Whenever, CTC is mentioned, same is annual i.e. an employee will get the amount for serving the company for one year. And whereas some of the amounts are not paid annually. Gratuity amount is one of them which are paid after serving 5 years and on separation. They claim that this is part of my annual earnings and as such pay me. Their claim seems to be correct and becomes difficult to explain and understand them.
So, I would favour that CTC should have only that parts which are actually to be incurred on a candidate during one year. All benefits available to the candidates on separation should be mentioned separately with terms & conditions applicable. However, we can add other benefits like leaves etc Separate condition of Payment of Gratuity after 5 years' service can help to bind the candidate after serving the company for 2-3 years.

From India, Panipat
DEAR ALL If the gratuity is considered as CTC than my question is if the employee left service before completion of 5 YRs than he will be eligible for gratuity which is included in CTC?
From India, Mumbai
One more doubt on payment of Gratuity to the employee. Now-a-days some of the companies are engaging retired officials in the employment with due designation on term basis. The term basis employment is extended periodically and the employee happened to be in employment more than 5 years i.e. the fulfilling the requirement of service as per the Gratuity Act. Are the retired employees deployed by the companies more than 5years have a right to claim Gratuity, in the event of their term of employment is extended periodically without any gap in service.
From India, Mumbai
I am trying to address the query of Sanjeev.Himachali, the original querist.
It is fine if the employer adds gratuity in the CTC working. At the same time, it is contingent upon completion of 5 years of service. Therefore it will follow that if an employee leaves without completion of 5 years, employer should pay the equivalent amount of gratuity due to the employee for the number of years served. (gratuity shown as part of CTC, in the last increment letter).
Since it is not gratuity but it is cost to company and also part of the employee's salary, employee may be taxed at appropriate rate.
A S Bhat

From India, Pune
As regards the second query posted by Mr. Shridharan Venkatraman, generally retired employees are asked to serve again on contract basis, against a lump-sum consideration basis. Such contracts are renewable at the discretion of the employer, and not termed as regular appointment of an employee. Usual appointment letter and contract formats differ in terms and conditions. In such cases employee benefits like gratuity or PF will not be applicable.
But if the terms of engagement take a character establishing employer-employee relationship then certainly gratuity will be payable, if the the previously retired employee works for more than five years. I look forward to receive more reactions to this from experts in the field.
A S Bhat

From India, Pune
Cost to Company (CTC) is the salary package of an employee. It indicates the total amount of expense an employer (organization) is spending for an employee in a year. CTC is not the actual salary of an employee, it also includes all the facilities an employee is getting during the service period.
Like Gratuity, many companies also include Mediclaim in the CTC. An employee is covered in the Mediclaim, only till the time he is employed in the company, so is it that if he leaves in between, then the company, should repay him the balance mediclaim amount as he is not using the same anymore.
Similarly, Variable Pay is also included (with a raider), this is payable only on certain achievements, by the self and company.
So, Including Gratuity is also permissible (with a raider). There is nothing illegal or unethical in the same.
Ashutosh Thakre

From India, Mumbai

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