Umakanthan53
Labour Law & Hr Consultant
Gayatri P
Hr Generalist
+2 Others

Thread Started by #aanand007

Greetings
In our company we mention Gratuity amount as part of Annual CTC in both offer and Appointment letter.
We used to mention in the offer letter that Gratuity is payable as per the Payment of Gratuity Act (with asterisk), however in recent case one of our employee is claiming that as Gratuity amount is mentioned in the offer, hence it is be paid irrespective of employee serves less than 5 years or completes 5 years.
Please let me know your opinion for the following questions
1. Did Gratuity is payable before completion of 5 years to the employee, if Gratuity amount is mentioned as part of annual CTC ?
Regards
A. Anand
26th June 2018 From India, Chennai
Dear Anand,
If one understands the purpose behind the projection of CTC in a job offer/ appointment letter and the difference between the gross salary mentioned and the corresponding proportionate amount of CTC projected therein, one can find himself/herself the correct answer for such a query relating to any such statutory fringe benefit that would come to fruition subject only to the conditions mentioned in the respective Law.
In short, CTC comprises of the cost of labor actually payable to an employee as per the contract of employment and the cost of retention of labor to be incurred by the employer both as per the contract of employment and his statutory obligations. Therefore, the mere mention of a statutory fringe benefit like gratuity in the CTC does not obligate the employer to pay when the conditions for such payment stand unfulfilled by the employee.
26th June 2018 From India, Salem
Dear Anand,
The Gratuity is a part of CTC for all employer. The employer makes provision in their books of account accordingly and gratuity is paid when it due.
The employee is eligible for gratuity on completion of 5 years of service( if leaving the job or super annuation or death) as the case may be.
1. Did Gratuity is payable before completion of 5 years to the employee? Ans: NO
2. Gratuity amount is mentioned as part of annual CTC ? Ans: Has got no meaning
27th June 2018 From India, Mumbai
Dear Mr Anand,
I faced a similar situation in Haryana. If Gratuity is part of CTC, it becomes payable as non e of the benefits mentioned in CTC are supposed to be deducted, instead some are payable immediately and some are payable at a later stage.
As per the discussions with Labour offficers and fraternity the same becomes payable once quantified as part of CTC.
I paid and I was also paid in same fashion.
Thanks
Raman Sachdeva
27th June 2018 From India, New Delhi
Dear Mr Raman,
I dont think the payment was in order.
Just because it was mentioned in CTC does not make it authorised unless other conditions surrounding the entitlement are also fulfilled.
27th June 2018 From India, Pune
Dear Raman,
I am not able to understand the logic behind your crisp answer. I shall be much obliged if you present the reasoning given by the Labor Officers and the fraternity with whom you discussed the issue. As far as I understand, no statutory benefit becomes automatically payable just because it stands mentioned in the C.T.C unless the statutory conditions for the same are fulfilled. Your personal experience may be an exception but no exception can be a rule.
27th June 2018 From India, Salem
You can put a note below your CTC structure mentioning that Gratuity will be payable as per the prevalent regulations/statute. This will help you in case of any queries in future from the employees.
Warm regards,
GP
27th June 2018 From India, Mumbai
Dear All,
There is no need to mention bonus and gratuity amount as part of ctc in the offer /appointment order. if in any case or under the existing practice of organization, you have to mention the bonus and gratuity in the offer/appointment order as part of ctc then you should mention in the foot note in the order that the gratuity will be payable as per the Gratuity Act or completion of five years of continuous service that is to say-four years and 240 days complete in the fifth year.the bonus also will be payable as per the bonus Act. In case the employee is exempted as per the Act at the time of payment of bonus .the bonus shall be payable.if nothing is specifically mentioned in the foot notes regarding payment of bonus and gratuity in the appointment order the gratuity is payable whether the employee has completed continuous service of five years or not.
Prithvi Singh Yadav
CEO
(Newerahr Management Consultancy)
Gurugram HR.
Contract no 9818713357,email
28th June 2018 From India, New Delhi
I have a small query about the Payment of Gratuity, i worked with a Company last 5 year 6 month and 6 Days
My Date of Joining is 29 oct 2012 and last date of Working is 05 may 2018
Basic + DA is Rs 34912,
Kindly Calculate the amount as per the Payment and gratuity Act Compliance
My Query is they are providing me the Payment of gratuity with the calculation of 5.52 years but as per my Knowledge
They should be paid my 6 years of gratuity for my tenur,
Kindly Clearly, they are complaint or non complaint
17th July 2018 From India, Kolkata
Dear All,
in My company There is an employeee whos is not completed one year in our organization and passed away..
i just need to ask is gratuity is applicable. He worked 4 month only with us.?
24th July 2018 From India, Kolkata
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
An Overview Gratuity Benefits
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. It is applicable to all companies having 10 or more employee. 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 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Calculation of Gratuity Benefits
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula:-
(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)
Factors affecting Gratuity Benefits
Gratuity Benefits changes with the change in the following:-
(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formulae of the Gratuity Benefit due to the amendment in the Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,
The impact of the above Factors on Gratuity Benefits can be understood by the following Examples :
(a) Change Past Service of Employee in the Company.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is no change in basic salary, only his Past Service Change then Gratuity Payments for the next 5 years will be:-
On Completion of 1 Yr - (15/26)* 2,60,000*1 = 1,50,000/-
On Completion of 2 Yrs - (15/26)*2,60,000*2 = 3,00,000/-
On Completion of 3 Yrs - (15/26)*2,60,000*3 = 4,50,000/-
On Completion of 4 Yrs - (15/26)*2,60,000*4 = 6,00,000/-
On Completion of 5 Yrs - (15/26)*2,60,000*5 = 7,50,000/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(b) Increase in wages of Employee in the Company.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month and there is the change in wages@10%, then Gratuity Payments for the next 5 years will be :-
On Completion of 1 Yr - (15/26)* 2,86,000*1 = 1,65,000/-
On Completion of 2 Yrs - (15/26)*3,14,600*2 = 3,63,000/-
On Completion of 3 Yrs - (15/26)*3,46,060*3 = 5,98,950/-
On Completion of 4 Yrs - (15/26)*3,80,670*4 = 8,78,460/-
On Completion of 5 Yrs - (15/26)*4,18,730*5 = 12,00,788/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(c) Change in Benefit Formulae of the Gratuity Benefit due to the amendment in the Act.
Mr. A Joins the Company with a Basic Pay of Rs. 2,60,000/- per month, His increment in wages@10%, and due to change in the Gratuity Factor as 1/1 from 15/26 then Gratuity Payments for next 5 years will be :-
On Completion of 1 Yr - (1/1)*2,86,000*1 = 2,86,000/-
On Completion of 2 Yrs - (1/1)*3,14,600*2 = 6,29,200/-
On Completion of 3 Yrs - (1/1)*3,46,060*3 = 10,38,180/-
On Completion of 4 Yrs - (1/1)*3,80,670*4 = 15,22,660/-
On Completion of 5 Yrs - (1/1)*4,18,730 *5 = 20,93,660/-
The above amounts are subject to Ceiling Limits on Gratuity Benefits applicable.
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act.
Mr. A Joins the Company with a Basic Pay of Rs. 5,00,000/- per month, His increment in wages@10%, and due to changes in Ceiling Limit from 10 Lakhs to 20 Lakhs then Gratuity Payments for the next 5 years will be:-
Case 1 - When Ceiling Limit on Gratuity Payment is 10,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/- Company liable to pay 10,00,000/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/- Company liable to pay 10,00,000/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 10,00,000/-
Case 2 - When Ceiling Limit on Gratuity Payment is 20,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/- Company liable to pay 20,00,000/-
Case 3 - When Ceiling Limit on Gratuity Payment is 30,00,000/-
On Completion of 1 Yr - (15/26)* 5,50,000*1 = 3,17,308/-
On Completion of 2 Yrs - (15/26)*6,05,000*2 = 6,98,077/-
On Completion of 3 Yrs - (15/26)*6,65,500*3 = 11,51,827/-
On Completion of 4 Yrs - (15/26)*7,32,050*4 = 16,89,346/-
On Completion of 5 Yrs - (15/26)*8,05,255*5 = 23,22,851/-
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act.
In the above examples for (a) to (d), If an employee leaves the company before completion of 5 years then "Nil" gratuity benefit is payable in the following events :
(a) on his superannuation, or
(b) on his retirement or resignation.
Case 1 - When Vesting Condition for eligibility is 3 years, Company will be liable to pay gratuity benefit on completion of 3 years in event of his superannuation, on his retirement or resignation.
Case 2 - When Vesting Condition for eligibility is 2 years, Company will be liable to pay gratuity benefit on completion of 2 years in event of his superannuation, on his retirement or resignation.
Case 3 - When Vesting Condition for eligibility is 1 year, Company will be liable to pay gratuity benefit on completion of 1 year in event of his superannuation, on his retirement or resignation.
Gratuity Benefits are long term benefits and are subject to the above changes, so it becomes mandatory for Companies to make Accounting/Investment for Gratuity Benefits.
In India, The Companies opt "Pay as you go option" for Accounting of Gratuity Benefits in their Financial Statement. In this option 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 an employee leaves the organization, company pay gratuity from their resources and get the tax benefit for the gratuity paid.
In case of Established Indian Companies, they set up a Gratuity Trust and make an annual contribution equivalent to their Accounting Provisions of Gratuity in the "Irrevocable Trust" and avail the tax benefits under Section 36(1)(v) of the IT Act 1961 and create a Corpus in "Irrevocable Trust" which is used exclusively to meet with Companies obligation towards Gratuity Payments as and when employee resigns or retires from the companies.
We have almost 10 years of experience in the computation of Gratuity Benefits as per “ Payment of Gratuity Act 1972” and its Legal, Accounting and Income Tax related aspects for Creation of Group Gratuity Trust Fund with Insurance Companies (i.e.LIC, SBI Insurance etc, etc.) and we have provided consultancy for administration Gratuity Trust Fund/Retirement Trust Fund in various organization in all sectors of Indian Economy on receipt of their Management request and If you wish to know details like:-
1. Who can be covered under Group Gratuity Scheme?
2. Why did companies require to create a Group Gratuity Trust - Decision Making?
3. How can companies administer Gratuity Trust?
4. What are Tax Benefits to Company by setting up Gratuity Trust?
5. What are General Benefits to Employee from a Gratuity Trust Set up by Company ?
6. Where to approach for setting up Gratuity Trust?
7. What is the documentation required for setting up Gratuity Trust?
8. What is the Process of Setting up a Gratuity Trust?
9. Which is beneficial to trustees a Self Managed Investment or Insurance Co. Managed Investment?
10. What is the Accounting requirement for Trustees?
We may also be contacted for other alternate ways the company can choose for the administration of Investment for Retirement Benefits and Long Term Retention Schemes for Productive Employees/Top Management of Companies?
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)
Mobile Number : 9211637063
Blog: http://gratuityconsultant.blogspot.com
Website: https://gratuity-trust-fund-consulta...s.site/?m=true
All Consultancy Services provided by us are subject to terms & conditions will be stated when a consultation job is accepted.
(This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.)
11th March 2019 From India, Delhi
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