Is It Okay to Include PF and Gratuity in CTC Without Deducting from Employee Pay?

Query on PF and Gratuity in CTC

Can anyone suggest if my company's strength is more than 20 or if all employees' basic pay is above 6500? The company is not under any PF/ESIC act, so can we show the PF and gratuity in CTC but not deduct it from the total gross paid to employees? Will we face any problems in the future due to this?

Permissibility of Showing PF and Gratuity in CTC

Is it permissible to show the PF and gratuity on the CTC even though it is fully paid to the employee?

Please suggest!

Attribution: https://www.citehr.com/478315-pf-app...#ixzz2nuaDexFu

Dear all,

Can anyone suggest if my company's strength is more than 20 or if all employees' basic salary is above 6500, and the company is not under any PF/ESIC act, can we show the PF & gratuity in CTC but not deduct it from the total gross paid to the employee? Will we face any problems in the future for doing so? Can we show the PF & gratuity on CTC even though it is paid in full to the employee? Please suggest!

Reference: https://www.citehr.com/478315-pf-app...#ixzz2nuaDexFu

PF or any other government funds may only be deducted if the company is registered for the same.

Regards,
Jatin
[Phone Number Removed For Privacy Reasons]

Understanding CTC and PF Contributions

CTC is an internal computation that has nothing to do with any government department. As long as you are not deducting from gross pay (note, I am saying gross pay, not CTC), then it is not a problem. However, when you do register, you are going to face a problem.

Currently, you are paying a higher amount to the employee by giving the entire PF amount (employee and employer contribution shown in CTC) with the salary. When you register and are required to pay this to the government, at that time, you have to deduct only the employee portion from the salary and pay the employer part on your own. There is a specific section in the PF Act that says that you are not allowed to reduce the salary for paying PF.

Legal Implications of PF/ESIC Deductions

I am surprised to see your post for a few reasons. I have a small firm, besides working with MNCs. Although I have completed an MBA with HR & Finance, these days I spend maximum time on balance sheets compared to HR. As said by Saswata Banarjee, CTC is an internal subject, but one has to follow the legal structure associated with it. Any corporate/firm is bound to follow INDIAN GAAP; otherwise, if someone is legally challenged, the corporate/firm can't defend itself in a court of law.

Now, in case your company is not registered under PF/ESIC but still deducting PF/ESIC from salaries (at least showing the same as per CTC breakdown), this is the first offense - forgery with PF/ESIC Dept & employees. Legally, you can show the same only if you are registered, and it's mandatory for corporate entities deducting PF/ESIC to have a ledger for the same if registered. The reason being, if such corporations are challenged under the law, verification/investigation can be conducted by the concerned department or law enforcement.

If you are not maintaining the ledger and deducting PF/ESIC (showing in CTC slab/payslip), then you can't defend yourself if questions are raised regarding the financial status of your corporate/firm. For example, no ledger means you can't show the account details in the Balance Sheet, despite making deductions. Where is this money going? To whom? If you claim you are paying the money to employees (showing deductions in CTC slab/payslip but not deducting actually), it is equivalent to showing a debit in the statement/employee's salary account or journal but not debiting. So, from some hypothetical account, this money must come (credit) to pay the deducted amount. Which account? How are you showing this in the Balance Sheets?

If you maintain a ledger and an investigation happens due to any reason, then the above questions will arise, with no answer to defend. At the same time, it will be validated that you are associated with some kind of forgery or malpractice.

Defending Against Legal Challenges

So, if any employee sues your firm and claims you deducted money for PF/ESIC but did not pay the same (even though you did), how will you defend? In the CTC breakup, you have shown a deduction, so the same will be there in the payslip. If you are paying the same amount to employees that you deducted for PF/ESIC, then officially this amount should come from an account (not the PF/ESIC account). In simple words, you have to show on the payslip why that amount is paid. You can't show PF/ESIC (reason being if you show PF/ESIC is reimbursed, then what is the use of deducting money for PF/ESIC in the first place on the payslip and why is it shown in CTC?). You can show as 'Special Allowance'/HRA, etc. Now, the question is, legally there is a debit statement for PF/ESIC, so you are legally deducting money for PF/ESIC but are unable to show legally that you are actually paying this money to the employee. So if an employee accuses you of not providing a PF/ESIC number, deducting money for PF/ESIC, and not paying the same, how will you defend yourself?

If your competitor goes to the IT dept/Corporate Affairs dept and complains against you for not following corporate rules and regulations along with labor laws, how will you defend? Your mixed account details will go against you first, hardly matters the efficiency of your CA who manages your accounts and your corporate HR. If during an investigation, they find a PF/ESIC matrix in your CTC while you are not registered with PF/ESIC, will they spare you? Will the PF/ESIC department remain quiet? ESIC provides emergency medical facilities to employees when needed, so if an accident occurs with any of your employees and they can't avail ESIC facility, although they have evidence of a deduction for ESIC in their CTC, will common people spare you or the family members or law enforcement agencies?

No one will believe that although there is a debit for PF/ESIC in the payslip/CTC/legal instruments, you have not made a debit. If you can show it officially, then the question will be, what was your intention to show PF/ESIC in CTC in the first place and then making deductions for the same in the payslip, then reimbursing it?

Regards,
Sovik B
Managing Director
S.S Enterprise
ph: [Phone Number Removed For Privacy Reasons]

As you mentioned, not having taken the ESI and PF codes is a violation of the law. If you have 20 or more employees, you are required to obtain a PF code. If all employees have a basic salary exceeding 6500, there should be no issue. You only need to deposit Rs7/- per month as an inspection fee, but obtaining the PF code is necessary.

Regarding ESI, if you have 10 eligible employees, you must acquire an ESIC code.

Whether to show PF and gratuity on CTC or not is an internal matter for your company.

Can anyone advise me if my company has more than 20 employees or if all employee basics are above 6500, and the company is not covered under any PF/ESIC act? Can we display PF and gratuity in CTC without deducting it from the total gross paid to employees? Will this pose any issues in the future?

Is it acceptable to reflect PF and gratuity on CTC even though it is fully paid to employees?

Please suggest!

What you have said is absolutely correct. What Pooja is saying is illegal not only from an HR perspective but also from a financial perspective. It hardly matters if the basic salary of an employee is more than INR 6500; as per PF rules and regulations, if an employee wishes, they can make arrangements for the deduction of PF even if the basic is higher than INR 6500. This is permissible. Similarly, basic guidelines show that for PF, employees' contribution should be 12% and employers should contribute 8.33% towards pension, 3.67% towards PF, and 0.5% towards EDLI. If any employee wishes, they can make arrangements for more deductions than 12%. This also reduces income tax for the employee.

On the one hand, if an establishment has more than 20 employees and is still not registered to PF/ESIC, it is illegal. On the other hand, without getting registered with the PF/ESIC department, showing PF/ESIC in CTC is a fatal error. This implies deductions for PF/ESIC in the salary statement or payslip (as per CTC's structure). Now officially, Pooja cannot show that this amount is being reimbursed. If she can show it, then the question arises: why is there PF/ESIC deduction in the first place if it is being reimbursed? Why is it shown in CTC? This indirectly provides incorrect information to the IT department as well!

The basic problem is that half of the HR professionals in India are unaware that it is mandatory for an establishment to have a PF code if the number of employees is equal to or more than 20. However, for including PF in CTC, the criteria slightly differ (in this case: the number of employees should be equal to or more than 20 and basic salary + DA should be less than or equal to INR 6500). If the establishment is registered with the PF/ESI department (meaning they have a PF code and all), and the basic+DA is above INR 6500 for employees, then it is entirely the establishment's internal matter to show PF/ESIC in CTC or not, provided the employee has no objection, i.e., they do not wish to opt for PF and ESIC facilities, regardless of the fact that their CTC is above INR 6500.

Corporate Affairs Department, PF/ESIC Department, SEBI, Income Tax Department, and other corporate legal entities will definitely take action if such incidents continue for too long and get reported.

Thanks and Regards,

Sovik B

MBA - HR and Finance

Managing Director

S.S Enterprise

PH: [Phone Number Removed For Privacy Reasons]

I just re-read your post and realized I had not seen it correctly the first time. In addition to my earlier post, I would like to add the following:

- You need to register both for PF and ESIC.
- If all employees are exempt, you still need to register and pay ₹7 per month for admin charges.
- Exempt employees must have a starting salary of ₹6,500 per month or higher when they first joined your organization. The current salary being above that amount is immaterial. Further, the basic + DA must be above ₹6,500. They must not have any existing account from any previous organization.
- The salary limit is ₹15,000 per month gross salary for ESIC deductions. So, you need to ensure all employees have a salary above that amount.

Regards,

If the company is not registered with the PF organization, they are not supposed to deduct any contributions towards PF, nor can they show a part of the CTC as a PF component.