Gratuity in IT Companies: Is It Mandatory and How Is It Handled in CTC?

Gratuity Payment in IT Companies

I am working with an IT company with 30-40 employees, and we are enrolled in the PF/ESI Act. I just want to know, is it compulsory to pay gratuity? If yes, then is it deducted from the CTC of the employee every month? Please help me out with this.

Regards,
Seema

The Gratuity Act is applicable if the employer engages 20 or more workmen in any month, and it has to be paid to the employee after the completion of continuous service of at least 4 years and 240 days. Of course, you can make a provision while deducting a partial contribution from his/her CTC.

Regards,
Janardan

Understanding Gratuity Payment

Gratuity is a terminal benefit payable by the employer to an employee upon the termination of employment, except in cases of dismissal due to proven misconduct, for which a prior notice of forfeiture must be issued by the employer. The Payment of Gratuity Act, 1972, serves as a comprehensive code regarding gratuity payable to employees in every factory, mine, oil-field, plantation, and port, regardless of their number. It also applies to every shop or establishment with 10 or more employees, as defined by applicable law, and other establishments with 10 or more employees as notified by the Central Government.

The minimum qualifying period of service for an employee to be eligible for gratuity is at least 5 years of continuous service. However, this requirement does not apply in cases of termination due to death or disablement. Establishments engaged in IT and ITES are typically covered under the States' Shops and Establishments Acts. Since your establishment is already covered under the EPF Act, the Payment of Gratuity Act, 1972, is applicable, and you are required to pay gratuity to your employees upon their termination of employment.

Contrary to periodic contributions to P.F. and E.S.I., the payment of gratuity is not based on mutual contribution. It is solely the employer's contribution, without any deduction from the employee's earnings. However, it can be included in the C.T.C. on an actuarial basis.

Regards

Understanding Gratuity and Its Implications

Umakanthan M has replied aptly. You are also requested to refer to the Gratuity Act to have a clear-cut idea about Gratuity. I am enclosing herewith FAQs on the Payment of Gratuity for your reference, which I am sure will help you understand it thoroughly.

Regards,

Hi, first of all, thanks to all of you for your suggestions. I have one more query: if we are providing a mediclaim insurance to employees, can it be considered a liability for gratuity? Does this mean we are still bound to pay gratuity?

Regards,
Seema

I would like to know, are we still liable to pay gratuity if the employee absconds just a few days after completing 5 years, and he was a legal suspect?

Regards,
Gayathri

Medical insurance for employees is different from gratuity. Medical insurance is provided to cover all medical expenses of the employees, whereas the payment of gratuity is for the continuous service of an employee. Both are different in nature.

Regards,
Seema

Yes, legally you are bound to pay Gratuity as per the Act.

Hi, No, you cannot deduct gratuity from an employee's part, and it is mostly recommended not to include it in CTC. Gratuity is solely the employer's contribution towards an employee who has dedicated five valuable years to the organization. Therefore, every employer must pay gratuity to an employee who has completed five years.

Regards

Hi Seema,

The Payment of Gratuity Act provides for the payment of gratuity on completion of 5 years of continuous service. However, in the event of the unfortunate death of an employee, the minimum requirement of 5 years is not necessary.

The concept of CTC is just to indicate the total cost involved in employing an employee by the employer. Not all the components mentioned in the CTC are deemed payable to the employee. Similarly, the payment of the company's contribution to PF and contribution to the Gratuity Fund with LIC or any other agency cannot be construed as recovery from the employee's CTC.

Regards,
Srikanth

Additional Detail: If any employer is intentionally delaying payment of gratuity beyond 30 days, the staff can file a petition to the Commissioner of Labour (Payment of Gratuity) in the prescribed form (Form 10N), and the government will follow up with the employer and ensure that the amount is paid.

Yes, dear. As some other gentleman has said, the organization is liable to pay his eligible gratuity even if he is caught in a legal/criminal case. However, if the organization has initiated any legal/criminal case against him for fraudulent activities, he will not be eligible if it is proved.

Regards,
Selvaraj Ponnuswamy.

Mr. Umakanthan aptly clarified the following points:
1. The payment of Gratuity
2. It is not connected to CTC.

Please read the same.

The Payment of Gratuity Act 1972 is a Social Security Act and applies to every shop or establishment within the meaning of the law for the time being in force in a State in which 10 or more persons are employed or were employed on any day of the preceding 12 months.

Gratuity is the Social Security right of an employee, which shall be payable to an employee on termination of his employment after he has rendered continuous service for not less than four years or 240 days, except in the case of the death of an employee while in employment with the company.

Gratuity is the Social Security Obligation of an Employer towards his employees and is legally bound to pay the same to his employees under Sec 4 of The Payment of Gratuity Act 1972.

As per Accounting Standard (AS) 15 (revised), every company is required to make provisions towards gratuity by way of independent actuarial valuation and provide for accrued liability in respect of long-term employee benefits.

As per Section 209 of the Companies Act 1956, every company is required to maintain books of account reflecting a clear, true, and fair view of transactions mentioned under section 209 (1) a to d.

Being a law-abiding Company, it is imperative for companies that they oblige and adhere to mandatory compliance under Accounting Standard (AS) 15 (revised-2005) read along with Sec 209 of the Companies Act at all times.

CTC and Gratuity

Cost To Company means any cost that the company bears (whether statutory or otherwise) on the employment of any employee into the company. If you read the above explanation, you will understand that the Company has to make a provision towards Gratuity, and that is a Cost To Company, and taking or calculating Gratuity as a component of CTC is justified.

Regards,
Octavious

What is told is that CTC, of course, stands for Cost to the Company. However, there is no recovery from the employee towards gratuity. It need not be shown on the payslip of the employee.

Dear Seema,

FYI, as per the Payment of Gratuity Act 1972, the act states the provision of processing gratuity to all on-roll employees. Enrollment in the PF/ESI act doesn't have any coinciding point. There is no relation between establishment/factory registration under PF/ESI and making provision for gratuity to its employees. Moreover, concerning the POG Act 1972, it shouldn't be included as a part of CTC because it will be taxable as income on salary. Furthermore, it is paid to the employees after a minimum continuous employment of 5 years in the respective company/organization.

Dear seniors, I have a query regarding the maintenance of the salary register to demonstrate that the company has distributed the appropriate amount as salary and wages. Additionally, the bonus is paid through the bonus Form C register. Could you please clarify how the gratuity amount is paid? Which register is used to verify that the company has provided the specific amount as gratuity? In which register is the gratuity payment mentioned?

Regards,
Dinesh

A separate register should be maintained for the payment of gratuity. Apart from this, the gratuity settlement sheet for each staff member should be maintained separately. This sheet will include the calculations for the gratuity amount and the stamped receipt from the staff.

Mr. Umakanthan has aptly replied to the provisions as existing in the Gratuity Act, 1972. It is a welfare legislation intended to reward an employee for their long, unblemished service in an establishment. I feel small establishments, in order to meet the future payment of gratuity, can create a fund by depositing the actuarial value of the workforce regularly.

Regards

In my company, gratuity is part of CTC, and it is being deducted from my monthly salary. Is it right as per the law? What if I don't want to work for 5 years.

I appreciate the contribution of Mr. Umakanthan on the issue of "Gratuity." His explanation, in a nutshell, is quite informative.

Regarding including the Gratuity in CTC

Inclusion in CTC or not to be included opinion differs because the concept has no legal support from any of the statutes. It is all an act of glorifying the benefits that the organization wants to give to an employee. As long as the system of negotiation of payment of salary and related benefits are bargained, the CTC system prevails. Since the gratuity is charged and provision is created for employee benefits in its accounts, the company definitely has an option to include it in CTC.

HR Gayathri's query raises two issues

(1) The employee in his fag end of 5 years of service has absconded, legal suspect whether the gratuity is payable? For the issue no. 1 of the question, the answer lies in Section 2A of the Act, which deals with the continuous service and its explanation. Since the employee has absconded, action taken to deal with his absence is not explained, which means it is still open. If the management terminates his service as per the service rules or the standing orders, payment of gratuity does not arise because "Gratuity" is payable on three occasions only: (a) on superannuation, (b) on his retirement or resignation, (c) on his death or disablement.

Regarding Legal Suspect, it is not elaborated or explained in brief, so no suggestions.

One of my friends joined the company as a consultant in January 2001. He was raising a bill every month and was receiving consultancy fees monthly. He was also eligible for a yearly performance bonus like regular employees of the company. After around four years, in April 2005, he became a regular employee and received a complete CTC letter, including PF and other benefits.

In this case, if he leaves the company today, will he be eligible for gratuity from January 2001 or from April 2005? There was no break in his job during the consultancy period. According to the company's records, his joining date is April 2005.

Kindly guide me.

Understanding "Contract of Service" and "Contract for Service"

A "contract of service" is an explicit or implied agreement between the individual who provides employment, called the "employer," and the other individual who accepts the employment and serves under the former subject to his control and supervision as per the terms of the contract, and therefore called the "employee." Thus, there exists a substantial relationship of employer and employee governed by the terms of the contract between them. The consideration payable to the employee is called "salary" or "wage," and certain other statutory benefits are called "fringe benefits" of employment.

A "contract for service" is an explicit agreement between two parties, where the provider of the service is called the "contractor," and the other who receives the service is the "contractee." Here, the contractual relationship between the two lasts only during the subsistence of the contract, subject to the mutual compliance of the predetermined terms of the contract, and no substantial relationship is created thereafter. The consideration payable to the contractor under the contract for service is "contract charges" or "fee," depending on the nature of services rendered.

Case Analysis: Contractor vs. Employee

Regarding your friend's case, for the first 4 years from 2001, he was under a contract for service and therefore a contractor only rendering specified services to the organization. From 2005 onwards, he became an employee of the organization under a contract of employment.

Therefore, if he resigns now, he cannot stake any claim for gratuity for the period of service rendered as a consultant, despite there being no gap between the two spells: the former one as a contractor and the latter one as an employee of the same organization.