Is Gratuity Really Part of My CTC? Seeking Advice on Early Exit and Legal Options

Hi Friends,

I have a question. Can you help me? I have joined an MNC with a CTC package. They have included gratuity as part of my CTC and also deduct it on a monthly basis, reflecting it on my salary slip.

1. Is gratuity a part of CTC or not?
2. How can I receive my gratuity amount if I leave the organization before completing 4 years?
3. Are there any laws that allow me to take legal action against the company based on my Appointment Letter and Salary Slips?

Please assist me.

Regards,
V.K.

Dear V.K,

This has been a normal trend with companies these days. They include gratuity as a part of CTC. As you must be knowing, CTC is the cost to the company, which means how much you are costing the company. So, gratuity and even the company's contribution to PF will be deducted from your CTC. Always remember, while negotiating for salary, try to focus more on your take-home salary/gross salary and less on CTC. You will not be paid gratuity if you leave before 4.5 years. :-)

Rgds/Rakhee

Gratuity is the amount the employer pays gratuitously for the services rendered by the employee. It was then made a mandatory obligation of the employers, and the length of service defined as 5 years. It should be taken as 'something in addition to whatever is paid as a salary' when the employee leaves the employer. But nowadays, it is seen as a tool for attracting candidates. By showing the gratuity amount as part of remuneration, the total amount will increase. However, when the employee opens the pay packet, they will realize that various deductions have been made. This is one such deduction.

If an employer deducts an amount from the employee's salary, it should be assumed that the same will go to a fund refundable with interest in the future. Therefore, if gratuity is deducted from the salary every month, it should be considered refundable with interest, regardless of the length of service. It can be interpreted as an amount paid by the employee to the employer temporarily. Additionally, any deduction made by the employer, other than those allowed under Section 7 of the Payment of Wages Act, 1936, should be considered an unauthorized deduction and must be refunded.

Gratuity is payable after 5 years of service, and the amount is dependent on the employee's salary at the time of leaving the job. It is not possible for the employer to predict whether a particular employee will stay for a continuous 5 years or how long they will remain with the employer. Likewise, it is not feasible for the employer to foresee an employee's salary at the time of leaving the job, especially not before 5 years.

Treating gratuity as part of remuneration and deducting it on a monthly basis without regard to the length of service makes no sense. If it is treated as part of the salary, the employer should return it when the employee leaves, irrespective of the length of service.

Please refer to the following link as well:

https://www.citehr.com/129726-amendment-bonus-act.html

Regards,

Madhu.T.K

Hi Rakhee,

I have a supplementary question. What is the exact period when an employee leaves the organization that can be construed as being equivalent to 5 years? What I mean is, can 4 years and 6 months be construed as 5 years, or what is the exact period from where gratuity actually becomes eligible? Also, if you have the link to the 1972 Gratuity Act or any Amendment where this period is mentioned, it will be helpful. The 1972 Act does not clearly mention this.

Regards, Sridhar

Dear Sridhar,

An employee is entitled to payment of gratuity only when he/she puts in continuous service of five years. However, where an employee (not employed in a seasonal establishment) is not in continuous service for a period of one year or six months, he/she shall be deemed to be in continuous service under the employer if:

- If the employee has actually worked under the employer for not less than 240 days during the twelve calendar months preceding the calculation date.
- If the employee has actually worked under the employer for not less than 120 days during the six calendar months preceding the calculation date.

Therefore, for entitlement to Gratuity, the employee must have four years of continuous service, and in the fifth year, work not less than 240 days if considering the whole year or 120 days if it is beyond 4 years 6 months.

Hope I have answered your question. CiteHR members may correct me if I am away from the statute.

Regards,
Srikanth Ramaraju

Dear Sridhar,

For gratuity, 5 years means 4 complete years, and in the fifth year, the employee must have worked for 240 days. These 240 days would be considered as one year. However, after 5 years, six months would be considered as one year. This means that 5 years 6 months would be considered as 6 years for the calculation of gratuity.

Cheers,
Sudhir

Please guide me on salary calculation for the month of December 2009.

Suppose December has 31 days, and I am on leave for 4 days. How many days am I eligible to receive the monthly salary for December, and how much gratuity amount will be deducted from my salary?

Regards,
PIYAN KUMAR SINGH

Piyan,

Gratuity amount is not a deduction from salary. It is an amount payable by the employer when the employee leaves after completing the eligible service of 5 years. Besides, it is a payment exclusively by the employer. Therefore, the question of deduction from the salary does not arise at all.

Regards,
Madhu.T.K

Gratuity Payment Process

Please tell me how the gratuity payment is made. What documents should I keep to prove that the company paid the gratuity amount? This amount is not mentioned on the salary register.

Regards,
Dinesh Kumar

Payment Voucher and Gratuity Collection

Payment voucher is the proof. You can also make an endorsement in Form L, which is an order issued to the payee to come and collect the gratuity on a specified date. Normally, it follows an application in Form I from the employee. However, Form I is not mandatory since it is the responsibility of the employer to pay gratuity even if the employee has not asked for it. Please find the attachments.

Regards,
Madhu.T.K

Gratuity Entry Concerns

My concern is regarding the gratuity entry for accounting purposes. The gratuity was paid and entered in the accounts book, but there is no proof for this entry as there is for salary and wages. This is what I am worried about.

Encashment of Earned Leaves and Bonuses

Secondly, in the organization, there is a policy to encash in January any excess of 75 earned leaves (EL) each year. This encashment is also mentioned on the salary slip. I would like to know if this encashment of EL should also be recorded in the salary and wages register. Additionally, bonuses are paid quarterly in this organization, and the bonus amount is stated on the salary slip. I need clarification on whether all these should be shown on the salary and wages register or not.

Regards,
Dinesh Kumar

Gratuity and Salary Slip Clarification

Who told you that gratuity should be treated like wages? How can we include it in the salary slip? No, you cannot include it in the wage slip but should account for it separately, like any other expense, such as debiting the Gratuity Paid account.

In a similar way, a bonus should also be paid separately and should not be shown in the salary slip. It is up to you to pay it quarterly, but as per the Bonus Act, you have to pay the bonus within 8 months of the end of the financial year. That means the bonus for 2013-14 should be paid on or before November. When you pay it quarterly, some amount will be due for payment, which is not proper as per law.

Regarding encashment of PL (Paid Leave), the same practice is to be followed. You can pay it without including the same in the wages register.

Regards,
Madhu.T.K