Understanding CTC: What Should You Include When Calculating Cost to the Company?

How do you calculate the cost to the company? What are the components we need to include when calculating CTC?

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Components of Cost to the Company (CTC)

To calculate the cost to the company (CTC), you need to consider various components such as basic salary, allowances, bonuses, benefits, and employer contributions towards insurance and retirement funds. Additionally, expenses related to recruitment, training, and employee facilities can also be part of the overall cost calculation. By including all these factors, you can arrive at a comprehensive understanding of the total cost incurred by the company for employing a particular individual.

Hi HEMA, To the best of my knowledge, the components to include in the CTC are as follows:

1. Basic
2. D.A
3. HRA
4. E.A (Educational Allowance)
5. T.A
6. L.T.A
7. Leave Encashment
8. Bonus
9. PF subscription of the employer's share
10. Cost of any housing or other accommodations provided by the employer
11. Cost for a vehicle provided or vehicle allowance
12. Any other amenities or services provided by the employer

Regards, K. Antony Prakash HR Manager

Dear Hema, With due respect to Mr. Antony's answer, you can also add:

* ESOP
* Overheads/Loans taken by the employer on the employee transfer
* Insurance (Group)

Mr. Antony, can you please suggest if we can include the cost of training in CTC?

Regards,
Srikrish

Hi Hema. To my knowledge, we have to include all the expenses to calculate the CTC of an employee.

1. All the components of the salary.
2. All the perks that are being given to the candidate (i.e., bonus, incentives, reimbursement of medical/telephone/petrol, benefits extended through various schemes like housing/vehicle/furniture/A/C, etc.).
3. All the contributions that the company makes for the employees like PF, superannuation, gratuity, medical insurance, etc., should also be included in calculating the CTC of an employee.

Hi Suresh,

Warm regards, are you sure that "GRATUITY" can be included in the CTC? Because we are not providing gratuity to all. Only those who have rendered service of five years and above are eligible to receive the gratuity. Therefore, I think that gratuity may not be a component of CTC.

Regards,
Antony Prakash. K.

While it is true that gratuity is payable only upon completing a certain minimum number of years of service, the employer still has to make a provision each year for the eventual/contingent payment. The provision made is usually at 12% of a year's Basic + DA. This represents a cost to the company.

Likewise, at a chosen rate of the Basic salary, if contributions are made by the employer towards the purchase of LIC annuities at each year-end under an internal Superannuation Pension fund scheme, then this too is a CTC component, even though there may be a qualifying period of service or other conditions of eligibility.

Origin of CTC Concept

CTC is a concept primarily started with American companies. Different parameters are used by different companies. However, the most commonly used items under the CTC are what the company spends directly on the employees, excluding the cost of infrastructure (space, PC, air conditioning, training, etc.).

Components Included in CTC

It includes the salary directly paid to the employees, the benefits directly attributed where the company makes contributions like Provident Fund, Pension funds (varying from country to country), medical insurance premium, life insurance premium, cost of loans given to the employee (some companies even include the cost of the loan the employee is entitled to but has not taken), telephone expenses for mobile and home line, benefits offered for visiting the home country or hometown, etc.

Regards,
Arif

Dear Hema,

Besides all these components listed by our friends, you can also include the value of any facilities provided by the employer, which might include FRP, loans, GPA, household policy, Medilaim, etc. Additionally, consider hard and soft furnishings, which I believe someone has already mentioned as perks.

Regards,
Gaurav Sharma
New Delhi, India

Hi Gaurav, Thanks for the valuable input. Could you also share what kind of compensation packages are currently best for the IT industry? I am facing a huge challenge here in forming the most tax-friendly package for new hires.

Pooja

Hi Suresh, Will performance incentives (performance-based) be covered in CTC?

Regards, Narasimman HR

Hi Narasimman, As far as I know, there is no hard and fast rule for CTC calculation except for the salary components being included. At our organization, we do not include the bonus and the variable pay (based on performance) under CTC. We calculate them over and above CTC and refer to it as gross salary. Therefore, it's up to you how you want it to be to attract and retain employees.

In surveys, employees do not see it as very welcome when their CTC is quoted as a big sum but what they get in their bank every month is a meager amount. Hence, it's not a good policy to include everything in CTC. If one wants to calculate the CTC for billing purposes, then you need to include all that you incur on an employee, which will also include the expenses incurred on their training.

Thanks,
Shailly Purohit

Cost to Company

Cost to Company is the cost of employing a resource. Whatever money is paid to the individual or spent in maintaining, retaining, or developing that resource is a part of his cost to the company.

As far as I understand your statement, in a non-competitive industry where talents are less in demand, bonuses, performance incentives, etc., can be included in CTC. Thanks a lot for helping me.

Hi,

Please check the attached document to calculate CTC. I hope this helps.

Regards

The CTC is whatever an employee will get on his exit from employment. This includes basics, HRA, allowances, perks, and any other benefits like mediclaim, personal accident coverage, etc., which are applicable to all. Even gratuity is counted by many companies as part of CTC.

Regards, Amit

Dear Antony,

I happened to come across some points on CTC. I think contribution to Gratuity can definitely be part of CTC because don't you think the employer has to make contributions to the fund once an employee joins the services of the organisation? Moreover, once he completes the 5-year term, he becomes eligible for it.

Best Regards,
Arun Natarajan

If we count employers' contribution to PF in CTC, and we also contribute towards the gratuity fund, then why should we not count gratuity as part of CTC?

Regards,
Amit

Dear Mr. Jitar,

I am a practicing HR professional from Chennai. I would like to make a project report on a compensation survey. If you could assist me, it would be of great help to me. Otherwise, if you have any project report that you could forward, that would be appreciated.

Regards,
S. Bhaskkharan

Sir,

How could we include leave encashment as it is entitled at the time of full and final settlement.

Regards, Shia

Hi All,

Can anybody share some useful info on the trends in Compensation management in the Indian IT Industry? I am eagerly awaiting all your helpful insights.

Thanks and regards,
KK.

Hi there.

Gratuity is never included in the CTC as it is a kind of reward given to an employee who remains with the company for 5 years. How can you calculate the amount of a person's gratuity in the 1st or 2nd year, which is to be given after completion of five years? There is never a certainty that a person would stay with the company for 5 years.

Thanks and regards,
Praveen.

Dear Mr. Bhaskaran,

I am an MBA student with a keen interest in HR. I would be grateful if you could kindly share the project report (or at least the non-confidential portions of it) for my academic study purposes only.

Thank you.

Warm Regards,
Jayendran

Hi,

I guess Gratuity is calculated when we are doing full and final settlement of the employee. It's given to the person who has worked for more than 5 years. Even if an employee has worked for 4 years and 6 months, they would be entitled to gratuity. However, if an employee has worked for 4 years and 4 months, they are not entitled to gratuity; it should be more than 4 years and 5 months.

The formula is:
Gratuity = 15(Basic pay + D.A) * No. of years in the service / 26 days

This formula will give you the gratuity.

Thanks,
Promila

Hi, everybody!

Cost to the company means the cost being incurred by an employer for employing and retaining the services of an employee. This includes the following:

1. Monthly salary: The components of monthly salary vary from location to location, employer to employer, and industry to industry. However, the general components are:

- Basic pay
- Dearness allowance
- Variable Dearness allowance
- House rent Allowance
- Payment of Lease rental against hiring of accommodation for the employee
- Transport/Conveyance Allowance

The above components can be renamed depending on the area and industry.

2. Medical Reimbursements: Reimbursement of expenses borne by an employee on treatment for themselves or other dependent family members. This may be limited to an amount or unlimited.

3. Subsidies: Subsidies provided by the employer to employees with respect to:

- Transportation
- Food (Breakfast, Lunch, or Dinner)
- Interest components of loans for vehicle purchase, house purchase, land purchase for building a house or construction of a house, etc.
- Subsidy on the Principal component of a loan

4. Reimbursement of Educational expenses for employees and their wards.

5. Insurance: Medical or General insurance: Costs borne by the employer for taking policies with respect to the above for the employees.

6. Statutory Contributions towards provident fund and ESI.

7. Bonus/Ex gratia: Payments made by the employer for statutory bonus payment or Ex gratia to employees.

8. Incentives: Incentives paid to employees for achieving targets.

9. Cost of Training: Costs borne by the employer for enhancing the skills of employees. In certain companies, this training is an essential component for employee retention, and special budgets are allocated to meet targets.

10. Leave Travel Assistance/Reimbursement: Costs borne by the employer to assist employees in traveling anywhere at the employer's expense.

11. Leave Encashment: Costs borne by the employer to encash the balance of leave available to the employee according to the company policy.

12. Cost of Gratuity: Costs of Gratuity to be borne by the employer for employee payment.

13. Superannuation cost: Costs borne by the employer to pay contributions towards the superannuation fund created by the employer for the benefit of specific or all employees.

14. Reimbursement of Newspaper and Magazine Costs: Costs borne by the employer to reimburse the expenses incurred by employees for purchasing newspapers and magazines for enhancement and updating knowledge as per the company policy.

15. Reimbursement of Telephone Expenses: Reimbursement of expenses incurred by employees for the use of personal phones/mobiles for official purposes as per the company policy.

16. Subsidy on the purchase of Household goods.

I believe that whatever expenses an employer bears on account of an employee are a cost to the company. However, for considering a component under CTC, a company policy must be in existence.

Regards,

Anil Anand

When we calculate Cost to the Company, we include all types of monetary benefits such as salary, reimbursements, performance allowances, incentives, and fringe benefits that are being rendered to the employee. The sum total of all these benefits mentioned turns into CTC, i.e., Cost to Company.

Hi Folks,

While reading the postings on various components of CTC, someone has mentioned that Gratuity is also a part of the CTC! Well, I disagree with the same. How do you allocate the cost, and what if the employee leaves the company after, say, 3 years? He/she is not eligible for the same. Then by what logic or rationality do we include the same? Is it fair?

Regards, Rajat

Dear Mr. Rajat,

My views differ with respect to the non-consideration of Gratuity as a part of CTC. I agree that if an employee leaves service prior to the eligibility period, this amount will not be given to him. However, once the Payment of Gratuity Act, 1972 becomes applicable to the establishment/factory, the employer is bound to comply with the statutory provisions as applicable.

Section 4A of the Payment of Gratuity Act, 1972 makes insurance of gratuity mandatory for employers. Subsection 2 of Section 4A states that the employer has to obtain insurance in the prescribed manner for their liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer.

To comply with this provision, every employer has to create a trust that deals with LIC on behalf of the employer. The trust creates a gratuity fund with the help of LIC, which keeps the fund and pays interest on the balance. In fact, LIC acts like a bank in this scenario. Investments made by the employer towards the gratuity fund are accepted by the Income Tax authorities as expenses for the financial year in which the contributions are paid by the employer. Although these payments are to be made to eligible employees in the future, the creation of the fund duly recognized by the Income Tax authorities as forwarded by LIC is considered as expenses for the current financial year by the Income Tax Authorities.

When expenses that are due in the future are being discharged by the employer in the current period under the statutory provisions, there is no harm in considering gratuity as a component of CTC. Once the employer has paid contributions towards the gratuity fund and the insurance premium to LIC, it means that they have incurred expenses on the employee.

Now, if an employee leaves service before the eligibility period, the employer will not get a refund benefit. However, they will have to pay lesser contributions for the next year. Additionally, if a significant number of employees entitled to gratuity leave services during the financial year, the employer has to immediately pay contributions to replenish the gratuity fund. In no case can the employer withdraw money from this fund. Any excess balance is to be settled among the members of the trust as per trust rules, regulations, and the provisions of the Income Tax.

Furthermore, if the employer does not follow the above provisions, they can be penalized for the violation of statutory provisions with a fine of up to Rs. 10,000 for the first offense and Rs. 1,000 per day for every consecutive offense. I believe that if the employer is aware of such provisions or is made aware of them, compliance should not be a big problem, and they will discharge their liability as per the law of the land.

In view of the above, I strongly believe that gratuity is a component of CTC, though it is a reward protected by law.

Regards,

Anil Anand

Hello everybody,

I am pursuing my MBA in Hyderabad and would like to know the words commonly used in HR. Can anyone provide me with important terms used in HRM for organizational development and leadership that are effective? I want to clarify that I am looking for words specifically related to these topics.

Thanks in advance.

Cheers,
Uday

Hello everyone,

I believe CTC is the total money that you spend on the employee. I would include the following factors in the CTC of an employee:

- Cost of Hiring - Entire recruitment & selection costs

- Opportunity Cost when Hiring (I'm not sure of this but I've heard that there is an opportunity cost when you select ONE person from a group which has 2 or more people who are equally eligible for the job after the selection process is over - i.e. you interviewed all and you found all of them suitable for the current job - but you could pick only one of them as you had only one opening. So just because you selected this person, you could not select any of the others - this is again an opportunity cost)

- Basic Pay / Salary

- Incentives / Bonus / Performance-based pay

- PF, Insurance, etc.

- All the allowances - (details have been given in so many replies)

- Managerial time - (time your manager spends in teaching you the work - it's an opportunity cost because he is not doing his work in the time that he spends with you - so it has to be credited to your account)

- Training cost - training other than the actual job (soft-skill training) or if you get an external trainer

- Cost of mistakes that you make

- Cost of Irrecoverable Mistakes that a company cannot do anything about (they obviously can't deduct this from your salary)

- Infrastructure Cost [Electricity, Computer, Internet (to use cite HR ;-)), furniture & Basic Amenities

- Cost of Re-Hiring - If this person whom they hire leaves the company before delivering results (uses our company as a doormat Grrrrrr!!!! :evil:) - A part of this also goes as a cost of hiring for the next person in the same place - too confusing, eh? :roll:

This is all that I could put from my understanding. Please add or give feedback on this.

Regards,

Manish Modani

Dear Anil Anand,

Many thanks for your detailed explanation. My point is if I have to include the same in CTC, then what should be the basis for the same? Since it's a statutory requirement - on the onus of the company, then should the burden be passed onto the new employee? Since it's a part of the CTC as the benefit accrued not yet claimed, should FBT be applicable?

Cheers,
Rajat

Hi Promila,
No it is not like this. An employee will be eligible for gratuity only when he/she completes 5yrs. of continuous services & after that the rounding off formula will be applicable as under:
For less than six months service – will be ignored and
For more than six months service – will be considered as full yr.
However the formula is ok.
Regards,
Rajesh

Dear Rajat,

Thanks for your compliments.

My submissions to your queries are as follows:

1. Basis for inclusion of Gratuity in CTC:

The basis will remain the same as defined under the Payment of Gratuity Act, i.e., Last drawn Basic Pay / 26 * 15 * No. of years of service (Max. 40 as per the act). However, for making payments towards the approved gratuity fund, the calculation of gratuity is done on a yearly basis. In general, a trust created by the employer and approved by Income Tax Authorities requests the employer to provide data (Current salary, DOJ, DOB) for both continued and newly joined employees to update records and recalculate the gratuity due until the date of the next renewal.

In the case of CTC, we have to recalculate the due gratuity based on the current salary data (after revision/addition/deletion of increments) and add the difference between the amount due and the available balance in the gratuity fund to the currently calculated due. I believe this is the only way to calculate and reassess the annual cost to the company concerning individual cases.

2. Passing on of statutory burden to the employee:

There seems to be no harm in doing so. Yes, employees may object that they will be entitled to gratuity only when they become eligible for the same under the provisions of the act and question why the employer is declaring this as a component of CTC.

This is where the intention of both the employee and employer comes into play. The employer is bound by statutory provisions and must discharge the liability under all circumstances. The objective of this statutory provision was to reward an employee for their long association with the employer and their contribution to the employer's business. However, in many cases, employees have been observed to defeat this objective. Some employees stay with an employer for five years just to cash in on the statutory applicability, fully aware that after five years of service, the employer is obligated to pay. In a court case where an employer refused to pay gratuity, the verdict favored the employer. It was noted that the employee's intentions, even regarding past employments, were clear. The court was also focused on achieving the objective of the statutory provisions. Therefore, in my view, we can pass on the burden to the employee to make them aware of the provisions' objective and their contributions to the employer's business.

3. Regarding the applicability of FBT:

Under rule 115WB of the income tax rules, there is no mention of an approved gratuity fund for the purposes of FBT. While the Superannuation fund has been considered for FBT, the approved gratuity fund, approved by Income Tax authorities under sub-rule (1) of rule 4 of Part C of the Fourth Schedule of the Income Tax Act, 1961, is not subject to the provisions defined under rule 115WB. Section (e) of subrule 1 of rule 115WB of the Income Tax rules does mention the applicability of FBT on statutory obligations, but there is no specific mention of gratuity.

The objective of FBT is to tax considerations made by employers provided to employees for their employment. Gratuity is separately liable for tax at the end of an employee's tenure. FBT is meant to tax the benefits provided by employers to employees in terms of facilities, not in terms of cash. These facilities are quantified in terms of cash and taxed at specific rates based on data available with the Income Tax department. Therefore, FBT does not apply to gratuity, and the employer will not bear an additional tax burden due to employees.

I hope this submission clarifies any doubts arising from unawareness.

Regards,

Anil Anand

Hi,

Can anyone tell me if the reimbursements of mobile bills/petrol bills/books, and periodicals, etc., can be considered as FBT benefits? Will it attract fringe benefit tax? And if it does, will it be okay if this is included in the CTC?

I would appreciate it if all could post the replies as soon as possible and also send an email to [Login to view].

Thanks in advance,
Amar

Hi All,

Please help me with the F & F process. Our company's notice period is 30 days. One of our employees resigned on 4th May and will be serving until 20th May. How should I go about calculating the amount to be recovered from him? Does it mean that we pay for 16 days, and he has to reimburse us for 15 days, resulting in a net payment for 1 day during notice?

Also, please guide me on the leave encashment process. He was just confirmed last month after completing a 6-month probation, and 17.5 leaves have been credited to his balance for the whole year. Our software company is small-sized with a team of 50. We have never had a leave encashment process for resigned employees. Please help as I am really confused about everything.

Regards, Smita

Hi Smita,

"Our company's notice period is 30 days. One of our employees resigned on 4th May and will be serving until 20th May. How should I go about calculating the amount to be recovered from him? Does it mean that we pay for 16 days, and he has to reimburse us for 15 days, resulting in a net effect where we will be paying him for 1 day during the notice period?"

Firstly, have you decided on the policy regarding resignations? Will the notice period be based on Basic salary or CTC? If not determined, it would be advisable to consider CTC as the base.

"Also, please guide him through the leave encashment process. He was just confirmed last month after completing a 6-month probation, and 17.5 leaves have been credited to his balance for the whole year."

The leave encashment would be calculated based on the basic salary. The format is as follows:

- Salary for all heads up to 20th May '06 proportionately
- Add:
- Leave encashment for 17.5 days at one month's basic for 30 days
- Less:
- Notice period for 15 days' salary
- PF deduction on leave encashment at 12%
- Taxes
- Statutory dues
- Net Amount

I hope this information assists you. Should you have any doubts, please feel free to ask.

Cheers,
Rajat

One of the simpler ways to calculate the full cost of an employee to a company is to use an activity-based accounting methodology, which not only takes into account the 'direct' costs associated with an employee (most of which have been mentioned in various responses you have received, but also measures how much the employee costs in terms of 'indirect' costs. This means that in addition to the parameters that have been mentioned, you should also take into account the cost of assets used by a particular employee (furniture, computer, etc.), the actual space in the office allocated to them, the per-person utilization of utilities and amenities of the office, and so on. This is a more consulting manner of cost measurement, and the objective is to actually gauge whether or not each employee is a profit generator or a cost center. You will have both in the organization. Therefore, having both is not a matter of concern. Obviously, you would want to have higher revenue generators than costs.

Hope this helps.

Mr. Anthony,

Are you sure employer contribution towards PF is a part of CTC? Isn't it a mandatory requirement for the company to pay the employee, to add the fund to the employee's account, but that's not counted as a part of CTC?

Hi Rajat,

Thank you for the reply. I was actually unwell for a couple of days, so I couldn't respond. We do not have any PF system here. Will I face any problems with salary calculation?

Regards,
Smita

Hi Smita,

"Thanks for the reply. Actually, I was not well for a couple of days, so I could not reply."

Welcome back.

"We do not have any PF system out here. So will I face any problem in salary calculation?"

I am surprised to note that PF is not applicable. Have you received an exemption from the PF authorities? If yes, then no problem. In the above working, skip PF deductions. It's better to cross-check, lest your organization faces problems in the future.

Cheers,
Rajat

Hi there!

Even I am waiting for the answer to the same. Should gratuity be considered as part of the CTC? Right now in my company, we are including that, but that's a dilemma. Could you please help?

Thanks,
Surmeet

Hi,

Yes, gratuity is taken as a part of CTC, similar to retirement benefits such as PF.

Best Regards,
Anudeep

Hi Anudeep,

"Yes, gratuity is taken as a part of CTC, as a retirement benefit, similar to PF."

Please explain your logic for including the same in CTC. What do you do if an employee quits, say in three years? How would you justify the same to the employee?

Cheers,
Rajat

Hi all,

While going through the answers posted by the Cite HR members, now you are aware of the components considered in CTC. Further, your concern for gratuity. Gratuity is considered as a part of CTC, subject to the Gratuity Act, because if an employee completes a minimum of five years, then he is entitled to get the gratuity. Hope this would suffice your query.

Regards,
Nelly_Bava

Hi friends,

Kindly let me know the difference between the three: CTC/Payroll salary, in hand, and take-home.

Hi, Emmy,

There is not so much difference between CTC, Cash on Hand, and Take-Home Salary.

1. CTC - Total Cost to the Company. It includes all monthly salary components, your yearly components like superannuation, PF, perquisites, etc., and your reimbursements like medical, LTA, professional pursuits, furnishing allowance, etc.

2. Cash on Hand / Take-Home Salary: In this, your monthly salary components minus your standard deductions like PF, ESI, professional tax, credit society, loan, etc.

Hope this will clarify your doubt.

Regards,
Nelly Bava

Dear Sir,

I agree with your view on gratuity, as not every company includes it.

Nishant Ranjan

Hi Everyone!!

Thanks for the response. Still, it seems that even after the whole discussion, we are still at the same point. Considering other benefits an employee is entitled to like PF, whenever one leaves the job, one gets that. Gratuity payment comes with the condition of completing 5 years. Should it be considered a part of employees who have completed 5 yrs or even for new joiners who are, let's say, in the job for the last 1-2 yrs? If they leave, they won't be paid. In that case, how is gratuity justified as part of CTC??

Keep exploring! Surmeet

Hi,

It should be taken as part of CTC, as a company that is hiring takes it as a long-term association. It is basically an incentive for staying long with the company. If an employee is staying with the company, he gets the benefit, and of course, it is a cost to the company.

Best Regards,
Anudeep

Hi,

I am happy to be a member of this site. Please help me out with how we can calculate CCA (City Compensatory Allowance) and what the standards are in major cities like Delhi, Bangalore, Chennai, and Hyderabad.

Thanks,
Rajesh.

Hello all,

Gratuity is very much a part of the CTC and is deducted from the first salary of the employee. However, the ability to withdraw the gratuity amount is provided to the employee post completion of at least 1 year of service with the organization. After five years, it is the right of the employee to claim and withdraw gratuity.

Regards,
Radhika

Radhika,

I have never heard of deducting Gratuity amount from the first or any salary of an employee. It would be an offense under the Gratuity Act 1972 as applicable in India. Please check at your end from accounts or any other authority in your company on whose authorization it is happening.

Please stop this else serious consequences have to be faced upon having a complaint from any source to the concerned government body.

Manoj

Hi Manoj,

"I have never heard of deducting gratuity amount from the first or any salary of an employee. It would be an offence under the Gratuity Act 1972 as applicable in India. Please check at your end from accounts or any other authority in your company on whose authorization it is happening."

Fully agree with you that gratuity should not be part of the CTC, as suggested by my colleagues on this forum. Would you please refer to us the relevant section under the Gratuity Act which terms the deduction of gratuity amount from the salary as an offence? Thank you for enlightening us on this.

Cheers,
Rajat

I am not saying that Grautity cannot be part of CTC but as you are saying that your company is deducting Gratuity amount form the first salary of the employees; I am giving clarification on this:

Section 7 of the Payment of Wages Act 1936 (PWA) permits deductions which can be made from wages and does not allow statutory deduction under the Payment of Gratuity Act (PG). A register is required to be made under the PWA to furnish the details of deductions other than mentioned under the above section. Section 20 of the act attracts penalty to contravene section 7 of the act. Better read with case laws, to have more understanding the law.

The preamble of Payment of the Gratuity Act itself is clear that it was enacted to introduce a scheme for payment of gratuity for certain industrial and commercial establishments as a measure of social security. The significance of this legislation lies in the acceptance of the principle of gratuity as a compulsory retrial benefit. (ref: Jeevan Lal Ltd. v. The Appellate Authority under the Payment of Gratuity Act.

The Act itself is Payment of Gratuity and not the Deduction of Gratuity. In nowhere in the act, it states of deductions and however, the word ‘payment' has been used. No act fully describes to its executions principles and therefore, the appellate authorities and legislative courts have the jurisdiction to impinge into its interpretations.

“Gratuity” as observed by the Supreme Court in its etymological sense, means a gift, especially for services rendered or return for favours received. See AIR 1970 SC 919, Delhi Cloth & General Mills Co. Ltd. v. Its Workmen. The general principle underlying the gratuity scheme is that by their length of service, workmen entitled to claim a certain amount as a retrial benefit. See AIR 1960 SC 251, Indian Hume Pipe Co. Ltd. v. ts Workmen. Gratuity has to be considered to be an amount paid unconnected with any consideration and not resting upon it and has to be considered something given freely or without recompense. It does not have foundation on nay legal liability, but upon a bounty steaming from appreciation and graciousness. Long service carries with it expectation of an appreciation from the employer and a gracious financial assistance to tide over post retrial difficulties.

Section 4(1) incorporates the concept of gratuity being a reward for long, continuous and meritorious services. It creates right infavour of an employee and at the same time creates an obligation upon a employer. (Jeevan Lal Ltd. v. The Appellate Authority under the Payment of Gratuity Act. Therefore it is a claim arising on his superannuation, retirement, resignation, on death, and disablement due to accident or disease and not by deduction from his own salary.

Section 8 if the act prescribes about the recovery of the gratuity and section 9 about the penalty. It is a punishable offence with an imprisonment.

I hope you are aware of the amendments incorporated till date in various sections of the Gratuity Act 1972. Please contact your co's lawyer for clarity; else be ready to face consequences in case of any complaint under the act or any statute inspections.

Cheers

Manoj

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Hi Friends,

Can you all please clarify my doubt about "GRATUITY"? Should we add it or not while calculating CTC?

Cheers,
Aishu.

Hi guys,

I am forwarding a document that contains all the information about salary design, including details about CTC. Please review the document to see if it answers any queries you may have.

Regards,
Sudha

Hi,

CTC!! -- the misnomer!

The term "cost to company" has come to be used in common parlance when we talk about a pay packet. This hitherto was considered as what one would get in his "pay cover". Be it cash or cheque. Attached to this was the "pay slip" giving details of rate of wages (basic + DA + other components) with deductions such as EPF/ESI/LIC/LOANS/ADVANCES/PT. This was calculated on the number of days worked in that calendar month. (This was provided as a format under the Minimum Wages Act.)

During the last decade, the trend changed. The cost per employee, i.e., the total expenses direct and indirect that a company would incur for retaining the employee, was calculated. This included salary, Employers' contribution on EPF, ESI, Gratuity, excess leave allowed other than the statutory allowed, Bonus in excess of the statutory, etc., and the final figure shown/offered as "CTC" to the employee.

The visibility of the employer's share was made prominent. This exercise is not understood by many as the basic thought lingering on the mind "MONEY IN THE COVER" -- the difference in the payment received from his/her previous employer might be marginal or in some cases less... so the feeling of 'BEING CHEATED' arose and the PR exercise for the HR began.

Most employers, to get over this area of anomaly, have given the details more LUCIDLY with workings and exact take-home amount. The adding of the EMPLOYERS' SHARE is shown clearly and how it is disbursed - monthly/Quarterly/annually.

It is always cheerful to remember this offer document is doing THE PUBLIC RELATIONS for your company. The letter is being looked at by many, and the peer talk should not send the wrong signals about the company!!!

hrg-rajaram

P.S. I had given this view for another posting and on the same thread here am reproducing this for relevance here.

Hi Aishu,

Gratuity is not part of CTC as it is not being deducted from employees' salary. It is a reward given by the company to the employee for their long association with the company.

Regards,
Sreekanth

Dear Friends,

Gratuity is not included in CTC; it is always given over and above CTC. I have seen salary structures of various organizations, and 80% of them include Gratuity in CTC, which they should not. Gratuity is always given over and above CTC.

Regards,
Anirudha

Hi all,

Quite an interesting discussion on whether Gratuity should be included in the CTC or not.

I have worked in companies where gratuity was added to the CTC, and in another one, gratuity was not included in the CTC. In case gratuity is paid as per the law, i.e., 4.81% of basic + DA after completion of 5 years of service, it is not included in the CTC. However, if the employer includes it in the CTC, it has to be paid by showing it in the CTC as a part of the retention amount. Upon termination of the employer-employee relationship, the same has to be given even if the employee has not completed 5 years of service.

With Regards,
Anand

Dear Friends,

Why the confusion on Gratuity? "CTC" means "COST TO COMPANY" - any costs/expenses towards employees count as CTC. We should know this. If we are including gratuity and paying without waiting for the 5-year completion period, it is part of CTC. If we don't include it, it is also a part of CTC if we pay after 5 years. We should fix/create two types of CTC:

a) Monthly CTC
b) Annual CTC

If we do this, our confusion will go away.

Regards,
Sidheshwar

Dear Friends,

For better understanding, I am enclosing a very good CTC format which will solve our issue. Please find it attached.

Regards,
Sidheshwar

Hi all,

I have recently joined an organization where I have been given the option to structure my own salary. My CTC is Rs. 23,000 per month. I would be grateful if anybody could help me create a salary structure that maximizes the amount in hand with minimal deductions or taxes.

Thanks,
Devjit

Hi Sudha,

Thank you a lot for the information!

Can you please provide information on the Minimum Basic Salary in northern states of India (Delhi, Uttarakhand especially)?

Awaiting your reply.

Satish Renikunta
Email: rensat_2000@yahoo.com

Dear Anthony P,

It's great to be in Cite HR as a member where we can have a word with seniors like you. Mr. Anthony, I do have a query about Gratuity:

1) In our company, Gratuity in (D-Retirement) is included in our Monthly Package. My monthly gross is divided into A-Monthly, B-Quarterly, C-Annual, and D-Retirement Benefit (PF + Gratuity + Super Annuity).

For example, Monthly Gross = 18000 (divided into 4 categories as above).

That means my Retirement Benefit is included in my gross package.

My query is if I am paying my Gratuity from my own monthly gross, why should I get the same amount that I am paying after 5 years only? And if I am leaving the organization before 5 years (e.g., after 3 years), am I not eligible to receive the amount for those 3 years?

2) If the company is paying the same amount excluding my monthly gross, then I assume we are not eligible for it. This amount we will get after completing 5 years as per the Gratuity Act.

Can you help me understand the Gratuity Act or is there any way to receive the same from the company?

Regards,

Anthony M.

You could either take it as the amount a company spends for the benefit of an employee. You should count every penny spent (in terms of CTC that has to be calculated for internal use) and while calculating in terms of a salary, just exclude the gifts, bonuses, sales incentives, etc.

Please correct me, seniors, if I am wrong...

Hi,

My understanding from this discussion is that gratuity is a reward payable on completion of 5 years, and that if it is shown to an employee as part of his CTC, it has to be paid even if he does not complete 5 years.

If a company includes gratuity in the CTC package but refuses to pay the amount set aside as gratuity because the employee has not completed the full 5 years, how can we compel the company to pay up?

Regards,
Sree

Hi,

Gratuity cannot be taken as part of CTC unless it is paid by the company when the employee leaves the company. Otherwise, it shall be paid only upon completion of continuous service of 5 years with the company. Therefore, neither the company nor the individual employee is sure of the continuity of service. Some companies include Gratuity as part of CTC, but it is not a fair practice.

Thanks,
Suresh

Hi Anthony P,

I will be completing 5 years of service by Dec 1st, 2008, in my present company, but there is a small clarification on this:

My company was previously named xxx, where I worked for 3 years, and now it is changed to yyy, where I will complete by Dec 1st, 2008 - 2 years. But the processes are the same, and only the name has changed between these 5 years. So, can I claim Gratuity in this regard? Please let me know.

Sathish KK

Hi all,

I joined a company where my CTC per annum was fixed at a certain amount and broken into different components, including gratuity. Now the company has restructured the salary structure by increasing the basic component, which has consequently had a bearing on the different components of salary such as PF, gratuity, etc. However, the "total CTC" is still the same.

As a result of the above exercise, my take-home salary has decreased on account of a higher deduction of my and the employer's PF contributions, as well as an increase in the gratuity component.

I know the company is not justified in reducing the cash component of my salary, but my query is: Can the company legally reduce the cash component of my salary on account of an increase in the gratuity component?

Thanks and regards,
Sachin

Hi to all,

Can you please provide me with information about gratuity-related aspects such as the percentage of gratuity, features for both employees and employers, interest rates on the deduction of gratuity amounts, what the deduction is taken from, etc.?

Thank you.