How Do You Calculate Gratuity for New Employees in Cost to Company? Seeking HR Insights

Dear HR Managers,

Good morning! I am working as an HR Manager at a reputed hospital in Central Delhi. My management wants me to redefine the company's costs to the employees by adding various factors like gratuity, leave encashment, etc. Gratuity is applicable to an employee only after the completion of 5 years of continuous service. I am a little confused about how to calculate the same for new employees.

I am waiting for your valuable feedback on the subject.

Thank you.

Regards,
Sreehariprasad N.
Manager HR DHLI

Had you searched CiteHr, you would have found some discussions at https://www.citehr.com/48148-calcula...mpany-ctc.html. It all depends upon your company policy, as someone said.

Have a nice day.

Regards,
Simhan
A retired academic in the UK

Components of CTC

CTC is normally a combination of three main heads:

- **Fixed Annual CTC:** Generally consists of Basic, HRA, Special Allowance, Medical Allowance, Conveyance Allowance, and various other allowances, Superannuation, LTA, etc.

- **Variable/Incentive/Performance Bonus**

- **Other Benefits/Perquisites:** Include Vehicle facility, Housing Facility, Gratuity, Mediclaim Insurance, Personal Accident Insurance, Mobile/Residential Telephone facility, etc.

Components a & b can be quantified easily. However, for Other Benefits like a vehicle, phone, housing, you can consider the actual amount paid by the company, premium paid individually for insurance, gratuity can be quantified as (15 days basic/26) * 30 for a year. Although the same is not being paid by the organization, the company is paying to the trust to make a provision for the same. Similarly, for Leave encashment, you can obtain provisional figures from your Finance & Accounts department as booked by them in their books of accounts.

Hope this information will help you.

Regards

Dear Sreehariprasad,

Regarding your query:

Provision of Gratuity in Accounts

Normally, the provision of gratuity is booked in the books of accounts because it is a liability for the company. The calculation of gratuity in CTC on a monthly basis is that 4.81% of the basic salary will go to gratuity accumulation.

Encashment of Leave Policy

As for the encashment of leave, establish a policy that specifies the maximum number of days that can be encashed in a year, regardless of the accumulated leave. This restriction will aid in determining the amount to be reserved for encashment. Alternatively, if you need to calculate the entire leave encashment, compute each employee's outstanding encashable leave and compile them for provision in the books of accounts.

I hope this is clear. Wishing you all the best in your HR career.

Regards,
S. Sethupathy
Excellent HR Services
Erode.

User Input:
You have the following three options to consider the cost of gratuity in CTC. Discuss these options with your management and come to a conclusion.

1. Add 4.8% of Basic Salary + DA as a monthly cost of Gratuity, only in the case of those employees who have completed 5 years of service.
2. Add 4.8% of Basic Salary + DA as a monthly cost of Gratuity, in the case of all employees irrespective of their length of service. This is more realistic since gratuity is payable even before the completion of 5 years of service, in case of the death of an employee.
3. In case you have taken a Group Gratuity Scheme Policy from LIC or any other insurance company, then add the policy premium paid by you to CTC by proportionately allocating it to individual employees.

Your answers have cleared all my confusions and greatly helped me come to a defined conclusion for future actions. Thank you so much!

Regards,
Sreehariprasad N
Manager HR
DHLI