Is It Fair to Deduct Gratuity from Your Total Cost to Company Before 5 Years? Let's Discuss

Understanding Gratuity Under The Payment of Gratuity Act, 1972

As per The Payment of Gratuity Act, 1972, gratuity is an award that an employer pays out of gratitude to an employee for their long and meritorious service at the time of retirement or termination of services. Payment of gratuity is, however, compulsory for employers, subject to eligibility mentioned in the legislation. One of the compulsory eligibility criteria is "Continuous Service of FIVE Years."

Components of Total Cost to Company (TCTC)

By definition, Total Cost to Company (TCTC) means the total amount payable to an employee or on behalf of an employee, directly or indirectly, in a year. Hence, among all other components, TCTC includes contributions towards Provident Fund (PF), contributions towards Employees’ State Insurance, payment of bonuses, the variable component of TCTC (performance-linked bonus, if applicable), and contributions towards any other benefits payable to an employee in a year.

Is Deduction Towards Payment of Gratuity Legal or Illegal?

Gratuity becomes payable if and only if an employee completes FIVE years of continuous service with the organization. If an employee leaves the organization within FIVE years of joining, they are not paid the gratuity amount, even though the amount has been deducted from their CTC and kept aside.

Do you think the deduction made from the TCTC of an employee towards payment of gratuity is legal or illegal? Is it ethical?

You can share your thoughts…

Hi Sanjeev,

It is not illegal to include Gratuity in the CTC, as it is an actual cost to the company. Many companies take insurance for Gratuity as well.

There is nothing wrong with including gratuity in the CTC, as an employer can include anything in it, including the cost of tea and coffee that an employee will have during office hours, the cost of uniforms that are given, and every rupee spent on the employee. However, what is wrong is the purpose or idea behind showing the cost of service of an employee as a cost to the company instead of the salary cost. This is just to attract people and lure them into accepting the offers given by the employer. The employer can put any amount as variable pay and say that if you perform, you can earn it, knowing that it is unreasonable and cannot be achieved at all. But the candidate who sells his service would accept it, thinking that it is available to him either as part of the monthly salary or is easily achievable. Everything goes wrong as time passes.

Gratuity Payment Conditions

Gratuity is a real payment but is payable depending upon certain conditions, i.e., continuous service of 5 years and the last drawn salary. If these conditions are mentioned, there is no illegality in including the amount in the CTC. However, it is not to be deducted from the salary but is paid subject to the above-mentioned conditions. I don’t think that any company will show this as a deduction from the salary in the pay slips. If so, claim it as an unauthorized deduction and get the amount refunded immediately.

Opinion on CTC Practice

I do not personally favor the practice of CTC. In my opinion, the price that the employer will pay for the services that each employee gives should be equal to the benefits that the employer gets from these services of the employee. That is why we often ask in a job interview, “Why should we hire you?” which implies, “What benefits would we get from hiring you?” This was ironically expressed by me long back when the concept of CTC was in its inception stage, which figured to say CTC should be renamed as Benefits to Company or BTC. Please follow the link below also.

Madhu.T.K: CTC Vs BTC

Regards,
Madhu.T.K

Discussion on Including Gratuity in Annual CTC

Whenever CTC is mentioned, it is annual, meaning an employee will receive the amount for serving the company for one year. However, some amounts are not paid annually. The gratuity amount is one of them, which is paid after serving 5 years and upon separation. Employees claim that this is part of their annual earnings and should be paid to them. Their claim seems valid, making it difficult to explain and understand the situation.

I would favor that CTC should include only those parts that are actually incurred on a candidate during one year. All benefits available to the candidates upon separation should be mentioned separately with applicable terms and conditions. However, we can add other benefits like leaves, etc. A separate condition of Payment of Gratuity after 5 years of service can help to retain the candidate after serving the company for 2-3 years.

Regards

Dear all,

If the gratuity is considered as part of the Cost To Company (CTC), then my question is: if an employee leaves the service before completing 5 years, will they still be eligible for gratuity which is included in the CTC?

Gratuity for Retired Employees on Term Basis

One more doubt on the payment of gratuity to employees. Nowadays, some companies are engaging retired officials in employment on a designated term basis. The term-based employment is extended periodically, and the employee happens to be in employment for more than 5 years, fulfilling the service requirements as per the Gratuity Act. Do retired employees deployed by companies for more than 5 years have the right to claim gratuity if their employment term is extended periodically without any gaps in service?

I am trying to address the query of Sanjeev Himachali, the original querist. It is fine if the employer includes gratuity in the CTC. However, it is contingent upon completing 5 years of service. Therefore, if an employee leaves without completing 5 years, the employer should pay the equivalent amount of gratuity due to the employee for the number of years served (gratuity is shown as part of CTC in the last increment letter).

Since it is not gratuity but rather a part of the cost to the company and also a component of the employee's salary, the employee may be taxed at the appropriate rate.

Regards, A S Bhat

As regards the second query posted by Mr. Shridharan Venkatraman, generally, retired employees are asked to serve again on a contract basis, against a lump-sum consideration. Such contracts are renewable at the discretion of the employer and are not termed as regular appointments of an employee. Usual appointment letters and contract formats differ in terms and conditions. In such cases, employee benefits like gratuity or PF will not be applicable.

However, if the terms of engagement take on a character establishing an employer-employee relationship, then certainly gratuity will be payable if the previously retired employee works for more than five years. I look forward to receiving more reactions to this from experts in the field.

Regards,
A S Bhat

Understanding Cost to Company (CTC)

Cost to Company (CTC) is the salary package of an employee. It indicates the total amount of expense an employer (organization) is spending for an employee in a year. CTC is not the actual salary of an employee; it also includes all the facilities an employee receives during the service period.

Components of CTC

- Like Gratuity, many companies also include Mediclaim in the CTC. An employee is covered by the Mediclaim only until the time he is employed in the company. Therefore, if he leaves in between, the company should repay him the balance Mediclaim amount as he is not using the same anymore.

- Similarly, Variable Pay is also included (with a rider); this is payable only on certain achievements by the self and the company.

- Including Gratuity is also permissible (with a rider). There is nothing illegal or unethical in the same.

Regards,
Ashutosh Thakre

Understanding the Concept of CTC and Gratuity

Probably the concept of CTC would have emanated from a stipulation under the Accounting Standards of ICAI that all costs of employees should be accounted on an accrual basis, whether paid or payable later. That's why gratuity, like other annual costs on an accrual basis, is accounted for in every year's accounts of an establishment to arrive at the Profit or Loss of the establishment at any point in time. Therefore, gratuity, together with contributions to PF, ESI, cost of leave accrued, LTA, insurance, other allowances, perquisites, and other employee-related benefits, etc., are bracketed under the CTC. Thus, gratuity in CTC is inclusive.

However, the stipulation that those who complete 5 years of continuous service are only eligible to receive should be done away with for the simple reason that gratuity accrued has already been earned by the employee and therefore accounted for by the employer year after year, and must be converted as "due & payable as and when he/she leaves" like leave balance encashable. Denying gratuity to those who fall short of 5 years of service gives undue advantage/enrichment to the employer because it was already charged in the accounts but only written back in the year of leaving by an overall adjustment/arriving at incremental liability.

Therefore, gratuity can be considered under CTC but subject to actual payment/disbursement only to become legal. Who will bell the cat?

Once people understand that CTC (Cost to Company) is the sum of all rewards and benefits which a company provides to the employee, all direct benefits (e.g., salary, DA) and indirect benefits (e.g., interest loans, Sodexo coupons, and savings contributions such as Gratuity, EPF) will be included. Gratuity will be paid if due after 5 years of continuous service; the company includes the expense in CTC. There is nothing wrong with that. As long as one realizes that their take-home pay will be lower than CTC, no confusion will arise.

The government is in any way proposing that like PF, the Gratuity can also be transferred to the new company and continuous service, i.e., without a break in service, will be the norm.

If the above proposal gets implemented, then the question automatically gets answered.

Regards,
Ashutosh Thakre

I don’t know whether the government has proposed like what Ashuthosh has said. The government can propose anything without understanding the consequences. They want only votes and not the welfare of people and therefore can announce anything before any general election.

I don’t think that this will be practical when the private sector employers are independent. In respect of an employee who leaves the service of an employer after 3 years, he has no gratuity liability as such, but the employer who hires this employee will be shouldering an unwanted burden of 3 years' retrospective liability and he would be forced to pay gratuity if this person leaves him in just two years. This is not at all practical. Even in the case where section 4A is made mandatory and all state governments notify that the gratuity fund is invested in LIC, it is not going to work because establishments who invest gratuity in LIC’s separate fund would be interested to get the unused funds of those who leave the company adjusted against its future installments and would not be ready to let it go to another employer along with employees who leave. Therefore, the proposal would not work in our present scenario.

Regards,
Madhu.T.K

Dear Madhu, I fully appreciate your apprehension and statement, "In respect of an employee who leaves the service of an employer after 3 years, he has no gratuity liability as such, but the employer who hires this employee will be shouldering an unwanted burden of 3 years retrospective liability and he would be forced to pay gratuity if this person leaves him in just two years. This is not at all practical," but only when the Government proposes to share the burden of one organization by the other. In that case, the industry itself would take up the cudgels against the Government to vehemently oppose the move, as no organization would like to pay from its own resources for the other.

But, probably, you seem to have misconceived the statement of Mr. Ashutosh Thakre. Mr. Ashutosh Thakre has stated, "the Gratuity also can be transferred to the new company and continuous service, i.e., without break in service will be the norm." I don't know the basis on which Mr. Thakre has stated so, but the sense of his statement does not seem to subscribe to the transfer of liability. What I understand is that the gratuity amount may be proposed to be transferred from one organization to another on joining a new organization. So, the issue can be expected to be clear only after seeing the Government proposal.

Dear Ashutosh,

To avoid misunderstanding and misconception in the minds of the members/industry, it would be better if you please intimate the source of your information, along with its web link, to enable the members to go through the proposal and form their viewpoints based on the spirit of the proposal in its right perspective, rather than assume anything in the absence of the proposal.

Dear All,

Kindly find the link based upon which I had said that the government is proposing to transfer the Gratuity like PF: [Labour law recast to add more leave to maternity, gratuity to be made portable - timesofindia-economictimes](http://articles.economictimes.indiatimes.com/2015-07-22/news/64725944_1_gratuity-act-maternity-leave-gratuity-benefits)

Regards,
Ashutosh Thakre

Organizations can include gratuity as a retirement benefit in the CTC. In this way, it is clear that an employee can only avail of gratuity upon retirement or if they leave the organization after completing 5 years of service.

Transfer of Gratuity Between Establishments

Transfer of gratuity from one establishment to another is already in vogue in Government, Quasi-Government, and Public Sector Units (PSUs) where employees migrate from one to the other with mutual consent or prior arrangement. Of course, these are not covered under the Gratuity Act but under their own Gratuity Rules. Likewise, leave at credit, the equivalent of which is also transferred by remitting the cash equivalent from the transferring establishment to the transferee establishment. In these cases, there is no five-year stipulation as in the Act.

I think there is no ban if these arrangements are put into practice in other sectors as well, if both parties agree for the benefit of the employees involved. The fears of an additional burden if and when implemented are only a misnomer, as year-on-year gratuity contributions are already loaded in the accounts, and therefore there won't be any additional burden whatsoever. If I'm right, even under the Act, there is a restriction to disburse to those with less than five years, but not transferring the past service. The only missing link will be how to address if at all there arises a break in-between.

Once the package includes the Gratuity as an indirect benefit of wage component, it is the duty of the employer to pay Gratuity to the employee irrespective of the compliance of the required service of completion of 5 years of service as per the Act. (Since the employer himself has the commitment to pay Gratuity from day one of the employee's service via the package issued to the employee). Is my understanding correct???

"Is my understanding correct?"
Sridhar, your understanding is incorrect. Gratuity will be paid only if the employee fulfills minimum conditions like 5 years of continuous service. The fact that gratuity is included in CTC is only an accounting understanding. After the due period of service, this amount will be due to be paid by the company upon the exit of the employee.

Dear Sanjeev,

Understanding CTC and Gratuity

By the term "CTC," we should not restrict our imagination merely to the point of view of HR. CTC (Cost to Company), as the term reveals, is an accounts and finance term that intends to denote the commercial accounting of transactions made with reference to staff and establishment matters, rather than any HR activity. For the purpose of HR, the terms salary, wages, pay, allowances, and emoluments can be well used. The CTC in a company denotes commercial values for accounting purposes, as the company has to maintain its accounts on a commercial pattern to arrive at the true results of profit and loss and assets and liabilities after shouldering its likely liabilities during and/or after the service period of the employees.

Gratuity Deduction: Legal or Ethical?

So, with reference to your assumption and question, "Is the deduction towards Payment of Gratuity legal or illegal? Gratuity becomes payable if and only if an employee completes FIVE years of continuous service with the organization. If an employee leaves the organization within FIVE years of joining, he is not paid the Gratuity Amount, even though the amount has been deducted from his CTC and kept aside. Do you think the deduction made from the TCTC of an employee towards payment of gratuity is legal or illegal? Is it ethical?" I would like to say that the gratuity element in CTC is not a deduction, but rather a held-up amount to show the liability that the company has to eventually bear in making payment after the employee actually becomes eligible, as per the law of the land. The said liability gets included every year in the annual accounts of the company to arrive at the true position of its profit and loss on a commercial accounting pattern for the purpose of informing its stakeholders and shareholders, so that the burden may not affect its revenue and profits in lump sum in the year of payment. In other words, that is just to facilitate the smooth sailing of their funding position and to reveal the real financial health of the company on a year-to-year basis.

So, the question of ethics, legality, or deduction of gratuity does not arise when it is concerned with the HR functions or the salary/wages of the employees, as that denotes a presumptive nominal value for the purpose of funding the operations of the company and to bear when it becomes due to be paid. However, if that does not become due to the employee due to his ineligibility, that remains as part and parcel of the profits and losses of the company that already stand incorporated in the books of accounts of the company.

Therefore, it is quite legal and has no illegality or ethical issues. Rather, it helps the employee to show his real worth when applying for another job elsewhere.

Regards

Understanding Annual CTC and Gratuity

As I know, Annual CTC is not a legal term. It is designed by companies to attract and allure new joiners. Therefore, companies go on adding any type of expenditure like gratuity, which is payable upon separation after 5 years of continuous service. At the start of the job, no tenure of separation can be decided. Hence, how can we say this is expenditure or accrued expenditure?

I may inform that only actual expenditure incurred is booked in the books. If any amount is booked in books on an accrual basis, the same is to be released to the concerned person/party before filing the ITR. Hence, no part of the CTC is booked in the books of accounts other than actual or accrual. If we examine from an income tax perspective, how can an amount be booked for which tenure or limit is not decided? Please note that gratuity is to be calculated based on the last pay drawn.

Dear Shri Gupta, If CTC is not legal in any way, it would be nice on your part to quote some section of the Act according to which that is illegal. That may not only enrich my knowledge but also enlighten all other members of the forum.

For your kind information, CTC has nothing to do with the Payment of Gratuity Act. So, you cannot expect any mention of the term "CTC" in the law pertaining to the Payment of Gratuity. The Act deals with the entitlement of the employees for the payment of gratuity and the penal provisions for violation of the law. Had the CTC been linked to the Payment of Gratuity Act, that would have definitely defined the term CTC and the penal provisions if the CTC would have been illegal in any manner. So, there is no use in raising any controversy about the accounting term "CTC" vis-a-vis the provisions of the Payment of Gratuity Act.

We must understand that both the HR and Accounting functions of any commercial organisation are quite distinct. While the Accounting department cannot raise any finger on the decision of the HR in payment or forfeiture of gratuity, the HR cannot interfere in the functioning and principles of accounting transactions by the Accounts Department.

Dear Sridharan, By your statement, do you really mean that the employer becomes duty-bound to pay the gratuity even if that violates the law of the land on the payment of gratuity, if the employer has included the element of gratuity in the CTC of an employee, and also that to discharge the so-called duty the employer is totally free to violate any law of the land? If so, would you please like to quote the appropriate section of the relevant law on that issue? That may help me enhance my knowledge, including that of other members of the forum.

I humbly disagree with some of the experts here (some have already disagreed like me, in this thread). Payment of gratuity may be illegal if the employee has not completed 5 years of continuous service. However, having committed to treat it as part of the employee cost to the company, is it not correct to expect the employer to refund the cost so committed by him through the appointment letter, even by calling it something else? After all, he has committed it through the appointment letter. I have even come across a case where the gratuity was paid after completion of even 4 years because it was included in CTC. He may make it subject to income tax, though.

Further, please enlighten me if the Gratuity Act expressly bars payment of gratuity when the employee does not complete 5 years. True, it makes the employer duty-bound to make the payment after 5 years of service. Which section bars it without completion of 5 years in case the employer still wants to pay it? - A S Bhat

To my knowledge, no deductions are made from employees' salaries by any employer. This component is only shown or included in the CTC to the extent of eligibility every year to project the sum of the annual cost of every employee to the Company on an accrual basis. Gratuity is neither payable on a monthly basis nor an annual basis like salary. If somebody is deducting from the salary, it's illegal.

Isn't it illegal if any employer chooses to pay gratuity to employees even if they didn't complete 5 years of continuous service? I think it's not so. Definitely, there is NO BAR. It would be fair enough and appreciated if some employer pays gratuity for <5 years of service as mentioned. Of course, claiming a deduction under the IT act is a different matter.

Understanding Gratuity Forfeiture

Probably, you are under some misunderstanding about the forfeiture of gratuity. Gratuity forfeited in a lump sum at the time when it actually becomes due for payment after the termination of the employee, or out of the amount shown through annual CTC, is one and the same thing. No change in the situation happens in the case of forfeiture, as per the law. That is merely an accounting implication. So, there is no illogical gain whether the forfeiture is at the time of termination or of the accumulated total, as shown in the CTC, when that is in accordance with the Payment of Gratuity Act.

I won't ever say the employer violates the law if they don't pay gratuity to those leaving in less than 5 years, as it's not legally payable. But when in a CTC situation, an employee is given to understand that they earn gratuity every year but it is not paid to them either monthly, annually, or even at the time of leaving, it raises questions. Where does the money go if not paid? Further, the very same employer either remits to the LIC or any other underwriters who administer their gratuity scheme the amount periodically or makes a provision in their accounts every year under the head "Retirement Benefits/Cost to Employees" (either actuarial basis as certified by an actuary or any other method being followed in respect of gratuity provisions as per Accounting Standard-15) together with:

- Provident fund
- Superannuation/pension
- Gratuity
- Leave encashment benefit on retirement
- Post-retirement health and welfare schemes
- Other retirement benefits

I only wish to make a distinction among the employers: those who follow CTC and others with a conventional pay package limited to basic, DA, and other allowances paid monthly. In the non-CTC group, employees, except those curious ones, do not even know what gratuity is, how much it is, and when they'll be paid, as theirs are not inflated with a gratuity component. So, they leave without much to bother about. Whereas a CTC employee leaves without gratuity payment, they know very much how much they lose, roughly 2 1/2 months' salary, which hurts. This money is retained by the employer! Of course, this is not illegal either. But we feel the difference in these concepts.

Regards

Understanding Gratuity Payment and CTC

There is no law that bans the employer from paying anything before the completion of the period or, in other words, more than what is mentioned in the law. The only difference is how you can legally say that the employer needs to pay the same compulsorily. There are many employers who abide by the law. So, the payment of Gratuity to be paid before 5 years is completely an individual company's decision. The law states that it must be paid upon continuous completion of the 5 years of service.

Also, no law states that what is mentioned in the CTC needs to be paid. If that were the case, many employers would include performance pay in the CTC and pay only as per the calculation (the actual amount paid is much lower). So, similarly to Gratuity, the employers need to pay the PP as mentioned in the CTC and not otherwise. Differences of opinion will exist, as it is just how the company looks at the bottom line.

Regards,
Ashutosh Thakre

Hi,

The company pays gratuity to its employees after completion of five years of service. Therefore, the gratuity amount is included in the Cost to Company (CTC) by the employer.

Dear Shri Bhat,

An appointment letter cannot supersede the provisions of the law of the land. If you or any aggrieved employee believes that the gratuity element, if included in the appointment letter, can well approach the competent court of law even for experimental sake and should get a landmark judgment, if the courts agree that the appointment letter can supersede the provisions of the law. If that happens, that can also prove beneficial to other employees in the industry.

Hi Sanjeev,

Thank you for raising the question in detail. I am also confused about this point when it comes to offering in the CTC concept. I request other senior members to clarify this for me.

Thank you.

No doubt, certainly it's payable once the reappointed/reengaged "employee" has put in a minimum of 5 years of continuous service on this fresh appointment based on his new salary (last pay drawn on leaving).

As per the new amendment in the Gratuity Act, if an employee has completed 4 years and 240 days in their organization, then the employee is eligible for gratuity.

Thank you.

Dear Mr. A. Thakare & Mr. Dhingra,

Once an appointment letter on a CTC basis is accepted by the candidate and he joins the company, it becomes a contract enforceable by law (Contract Act). Performance pay that depends on a formula is difficult for management to manipulate, but when it is indicative, it can be subjective. Gratuity calculation included in CTC is not subjective but is capable of being calculated. My point is, if the CTC includes gratuity and an employee leaves in less than 5 years, then the employer should compensate him with a suitable amount for the loss of gratuity included in CTC. Failure to do so would be dishonest or unethical.

Filing a suit or not is the choice of the employee; considering the time taken and expenses involved, it showcases his weakness vis-a-vis fighting a stronger opponent.

Regards,
A S Bhat

Further, if the employer has included a cost (in this case, gratuity) in one's appointment letter by way of CTC, he might as well incur it instead of taking advantage of the gratuity act.

- A. S. Bhat

Dear Mr. Dhingra,

It is true that no section in the Act requires the employer to pay gratuity to his employees for services rendered by them for less than 5 years. Such a brainstorming session on the CTC aspect would be a healthy discussion in this network among legal experts like you. Hence, this idea of mine is posted for discussion. Furthermore, when this matter comes to the attention of a court of law, I feel the court may take cognizance of this issue to arrive at a solution.

Dear All, I disagree with the notion that employers take advantage of the act and do not pay gratuity. Also, there is nothing unethical or dishonest in that. Having the same included in the CTC is simply a clear way of showing that the employer is investing in the employee so that if he stays for more than 5 years, not only the employer but also the employee can enjoy the benefits of having stayed with the company long term. Paying gratuity after 5 years ensures that both parties have a win-win situation.

By stating that the payment is to be given, we are implying that the relationship between employee and employer is only legal and for a very short period.

Regards,
Ashutosh Thakre

Understanding Annual CTC and Gratuity

"As I understand, Annual CTC is not a legal term. It is designed by companies to attract and allure new joiners. Therefore, companies may include various types of expenditures, such as gratuity, which is payable upon separation after five years of continuous service. At the start of employment, no tenure of separation can be decided. Hence, how can we classify this as an expenditure or accrued expenditure?"

In the above lines/concept, I did not mention that this is an illegal concept. However, I wish to emphasize that it is not a legislated concept but rather designed by companies, and accordingly, the concept is not homogeneous across all companies.

Clarification on Gratuity in CTC

Dear Mr. Thakre, I refer to your latest post. I wish to point out that if an employee renders service for more than five years and gratuity is not mentioned in the CTC, then will the employer not pay him gratuity?

Regards

Thank you for making that point. It's the other side of the coin, so if the employee completes 5 years and leaves the company, then can you say that the employee is taking benefit of the act for monetary gains? Likewise, why does the employer have to always take the blame that he is unethical for non-payment?

So, if it is mandatory for the employer to pay, even if it is not in the CTC as legally stated, then where is it legally stated that we need to pay it before the completion of the said period?

So, my point is, if the employee can hide behind the law, what's wrong if the employer does it.

Regards,
Ashutosh Thakre

Dear Mr. Thakre, You will agree with my point that an Appointment Letter with CTC is enforceable under Civil Laws for all employees (for ‘WORKMAN’ civil laws and ID Act, both options). Thus, all terms and conditions of the Appointment Letter, including CTC and gratuity, can be enforced through Civil Laws. Under Civil Laws, there are no terms and conditions for gratuity payment; rather, it can be enforced as per the Appointment Letter, and PGA cannot be enforced through civil laws. Gratuity payment can also be implemented through PGA, which in itself is a complete code. In my opinion, by mentioning Gratuity Payment in CTC, we are putting ourselves under two legislations. Kindly opine.

Thanks,
V K Gupta

Dear Mr. Gupta,

Point taken. Can you share the cases where the Gratuity was payable to the employee under the Civil Law, even before completion of 5 years? This will make the point proven and conclusive.

Regards,
Ashutosh Thakre

As CTC means it is the total cost incurred by the company to hire an employee, so gratuity is also a part of this, meaning it is a cost incurred by the employer on behalf of the employee. Therefore, it can be included in CTC.

Understanding Gratuity and CTC

Once an appointment letter on a CTC basis is accepted by the candidate and he joins the company, it becomes a contract enforceable by law (Contract Act). Performance pay that depends on a formula is difficult for management to manipulate; however, when it is indicative, it can be subjective. Gratuity calculation included in CTC is not subjective but is capable of being calculated. In my opinion, if the CTC includes gratuity and an employee leaves in less than 5 years, the employer should compensate him with a suitable amount for the loss of gratuity included in the CTC. Failure to do so would be dishonest or unethical.

The decision to file a suit or not rests with the employee, taking into consideration the time taken and the expenses involved, as well as his disadvantages when fighting against a stronger opponent.

Regards,
A. S. Bhat

Clarification on Compensation and Gratuity

Compensation and gratuity are two distinct terms. The law recognizes gratuity under the Payment of Gratuity Act, payable under specific conditions. The Payment of Gratuity Act does not acknowledge the payment of any form of compensation if included in the CTC and stated in the offer or appointment letter as gratuity. However, the employee can seek legal recourse to recover other forms of compensation under the Contract Act if desired, but not under the guise of gratuity. Whether the judge agrees to have the employee compensated in another form instead of the gratuity elements included in the CTC depends solely on the employee's ability to convince the court.

Even in such a scenario, the employee must be prepared to face trials and appeals in higher courts initiated by the employer. This would put the employee at a significant disadvantage due to trial costs, compared to the receipt of the gratuity element in CTC.

Therefore, practical considerations should be prioritized over theoretical debates on administrative or management aspects. This issue pertains to the implications of the law and the pros and cons of an employee's pursuit of the gratuity claim within the CTC. Ultimately, the course of action depends on the individual's judgment.

Please let me know if you need further clarification or assistance.

Sincerely

Dear Mr. Dhingra Sir, It is true that no section in the Act requires the employer to pay Gratuity to his employees for the service rendered by them in less than 5 years. Such a brainstorming session on the CTC aspect would be a healthy discussion in this network among legal experts like you. Hence, this idea of mine is posted for discussion. Furthermore, when this matter comes to the attention of the court of law, I feel the court may take cognizance of this issue to arrive at a solution.

Legal Authority and Amendments

Dear Shri Sridharan, No court other than the Supreme Court has the power to strike down any section of the law. Even then, the Government of India, being part of the Executive, will have to float some Amendment Act to comply with the judgment of the SC to amend the law. But still, the lawbreakers will be free to devise any other term to safeguard their skins from the clutches of the law. Ultimately, it is only the employee who will remain at the receiving end in the struggle between the employees and management, whether through the Judiciary or the Executive.

Regards

Discussion on Employee Sacrifices and Employer Investments

I have made my points, and you have made yours. Let us agree to disagree. However, there is one thing Mr. Thakre mentioned that I do not agree with: the idea that the employer has invested in the employee, etc. With this, I sign off from this discussion.

Does the employee not make similar sacrifices, giving secondary priority to their family and friends? Do they not work more than the mandatory 8 hours, even at a moment's notice? These days, I find people even in the public sector, like insurance and banks, where employees have to put in a lot more work than what is expected of them against all odds.

Regards,
A S Bhat

Let me put it this way, will an employee have the right to claim gratuity at the time of leaving even if he has only <5 years of service if the gratuity is part of his CTC as per the appointment letter? What if this letter is silent about the Gratuity Act and conditions imposed under the Act?

Dear Shri Bhat,

Your point of opinion is okay, but as far as the legal implications are concerned, HR has to act within the legal framework with respect to labor and service laws to maintain employer-employee relations. Unless any issue is specifically included in the law books, the opinion, if felt to be rational, needs the stamp of the competent court of law through legal trial, as the interpretation of the law rests with the competent court only, not with the executive. The term CTC is yet to appear in any labor/service law.

Regards,

Understanding Gratuity Deductions from the Perspective of "Books of Accounts"

There are TWO employees – Ramesh and Suresh.

Suresh worked with X company for THREE years. His Basic Salary during SIX years was as follows [there was no DA or Retention Allowance]: 20,000/- INR; 24,000/- INR; and 26,000/- INR. Company X has deducted 11,538/- INR; 13,846/- INR; and 15,000/- INR respectively from his CTC and kept aside (15/26*Basic). Because Suresh has resigned after THREE years, as per rules he is not entitled to Gratuity. So, what will happen to the amount of 40,385/- INR which has been deducted from his CTC in the last three years? Will they show this amount as profit?

Ramesh worked with X company for SIX years. His Basic Salary during SIX years was as follows [there was no DA or Retention Allowance]: 12,000/- INR; 15,000/- INR; 18,000/- INR; 20,000/- INR; 24,000/- INR; and 26,000/- INR. Since the gratuity has been included as a part of CTC, therefore, every year Company X has deducted 6,923/- INR; 8,654/- INR; 10,385/- INR; 11,538/- INR; 13,846/- INR; and 15,000/- INR respectively from his CTC and kept aside (15/26*Basic). However, when Ramesh resigned after the completion of SIX years, the Company should pay him 90,000/- INR (15/26*Basic*6) instead of 66,346/- INR [6,923 + 8,654 + 10,385 + 11,538 + 13,846 + 15,000/-]. How will they show 23,654/- INR [90,000 – 66,346]? Will they show it as a loss?

Regards,
Sanjeev

Let me put it this way, will an employee have the right to claim gratuity at the time of leaving even if he has only <5 years of service if the gratuity is part of his CTC as per the appointment letter, and if this letter is silent about the Gratuity Act and conditions imposed under the Act?

Gratuity Eligibility and Conditions

Dear Shri Kumar, unless specifically mentioned in the offer/appointment letter that the employee will be paid gratuity even for less than 5 years, in the normal course and within the framework of the Payment of Gratuity Act, the answer is no. If the employee has not served the organization for a minimum period of 4 years & 240 days, even if the element of gratuity is shown in CTC. Therefore, in the event of no specific mention about his eligibility for gratuity within less than 5 years of service, the discretion rests solely with the employer in terms of sec. 4(5) of the Act. For better terms than the provisions of the Payment of Gratuity Act, a specific mention in the agreement or contract is sacrosanct for the purpose of claim.

Regards

Understanding Gratuity and Accounting Implications

Dear Sanjeev, now your question has gone quite astray from the HR issues. With respect to the query about HR issues, profit or loss and accounting has no relevance. That is the headache of the Finance & Accounts personnel/Chartered Accountants on how to account for or under which head of account the amount has to be booked under the Indian or International Accounting Standards. As an HR professional, you have to take care of the provisions of the Gratuity Act, not the standards of accounting, which is also a very wide subject of specialization. Had that been the headache of the HR, there would not have been the need to create a statutory Institute of Chartered Accountants of India by the Government of India and to appoint chartered accountants by the organizations only after qualifying the tough examination in three parts of the Institute or to appoint auditors to audit the accounts of the organizations.

However, if as a general knowledge you are curious to know the nitty-gritty of accounting also with reference to the CTC, you may better sit with the CA of your organization to understand that appropriately.

Regards,
Sanjeev

Companies either take out an gratuity policy with insurance companies. or create a provision for accounting for gratuity amounts.
In such cases the amount which is earmarked in CTC but eventually not paid will be credited to the provision and amounts paid debited to the provision.
In the second case under provisioning has taken place.

Hello,

Thank you for clarifying on this topic. My question is that now I have changed about 3 organisations in the course of the last 12 years, and since I did not complete 5 years, my last employer did not pay me the amount of gratuity though it was part of CTC.

Can I ask them to pay that amount now? I left the last organization in 2012 by the way. (It is kind of late but I want to know the answer in such a scenario).

Thank you for your responses.

Entitlement for gratuity arises on completion of five years of continuous service in an organization. Therefore, you are not entitled to gratuity.

That apart, so far we have discussed with respect to the Payment of Gratuity Act. What is the scenario in respect of establishments to which the Gratuity Act is not applicable, and their employees are under the Cost-to-Company (CTC) regime, which includes gratuity as a component? One may say it should be governed by what is stated in their applicable Gratuity Scheme. There also could be a clause stating that gratuity is payable for more than 5 years of service.

Yes, gratuity should be a component of the Total Cost to Company (TCTC) in my view. CTC stands for Cost to Company, which means the cost of the company for that employee, including employee payment and employer expenses.

Thanks & regards,

Sumit Kumar Saxena