Understanding Gratuity: Is It Part of CTC and How Should Employers Handle It?

Hi, I am planning to implement a Gratuity fund in my organization. Could you please clarify the following doubts?

Gratuity as Part of CTC

1. Is Gratuity a part of an employee's CTC? If yes, can we show it on the payslip as a deduction?

Mandatory Gratuity Fund Maintenance

2. Is it mandatory for the employer to maintain a Gratuity Fund with an insurance company?

Direct Payment at Separation

3. We have almost 50 to 60 employees. Very few employees complete five years of service with the organization, so my employer wants to pay them directly at the time of separation. He is not showing interest in maintaining a Gratuity scheme with any other organization. Is this correct?

Your earliest reply will be highly appreciated. Thanks...

The topic of gratuity has been well covered in this forum. I advise you to use the search button to check out older articles. Have you read the Payment of Gratuity Act 1972? Have you read the Payment of Gratuity Rules, 1972? Kindly go through these vital laws. If you still have specific doubts, learned members will clarify.

Understanding Gratuity as Part of CTC

Gratuity is considered part of the CTC by employers because they either make a provision for the payment of gratuity or contribute to a gratuity fund. It's not mandatory for employers to maintain a gratuity fund; it is optional. Your employer can opt to pay gratuity to employees directly.

Benefits of Maintaining a Gratuity Fund

The only advantage of maintaining a gratuity fund is that if you pay a marginal risk premium, the gratuity is paid by the insurance company in the event the employee dies while in employment. This considers the service from the date of joining until the date he/she would have superannuated from service if he/she had been alive. Normally, if the employer pays gratuity directly, it will be restricted from the date of joining until the date of death.

Please remember, the insurance companies pay gratuity only from the fund contributed by you each year. If the gratuity payable is greater than the fund maintained by you, the insurance companies will deny the payment of gratuity. In other words, the insurance companies make gratuity payments to the extent the fund is being maintained with them by the employer. For this purpose, the insurance company computes an actuarial valuation every year and advises the employer to top up the fund to ensure gratuity payments to all employees without any hassle.

Regards,
M.V. Kannan

Gratuity and CTC

1. No, gratuity is not a part of CTC. We cannot show it on the payslip.

Gratuity Policy Requirement

2. Yes, it is mandatory to buy the gratuity policy from LIC or any other authorized insurance company.

Gratuity Fund Maintenance

3. No, it is not correct. We have to maintain the gratuity fund as per the Labour Department. Irrespective of whether an employee completes five years or not, from the day an employee joins the organization, they have to be included in the gratuity scheme by filling out Form F (nomination). Every month, Form 5 and Form 10 should be submitted to the insurance company to update the employee records.

Gratuity may be a part of CTC, but it should not be shown in the payslip and not deductible from the salary. It is not mandatory to maintain the gratuity fund with third parties like LIC, etc. It is optional for the employer.

Thirdly, your employer is correct. It can be paid directly by the employer to the employee at the time of separation if he fulfills the other conditions as per the Payment of Gratuity Act.

Hi,

I see the thread on the Gratuity Payment. Can gratuity amount be shown in the salary break-up of CTC, as this is also part of the employer's payment when it comes to the contribution from the company to the employee? Please advise.

Regards,
Swaminathan R

Gratuity contribution cannot be shown in a payslip, but in my opinion, it can be shown as part of CTC computation for reasons already explained. I reiterate it's not mandatory to maintain a policy for Gratuity with an insurance company. If the employer opts to pay directly, he can do so.

Regards, M.V. Kannan

I reiterate it's not mandatory to maintain a policy for Gratuity with an insurance company. If the employer opts to pay directly, he can do so.

Section 4A of the Gratuity Act makes it mandatory to have insurance. Kindly clarify.

Compulsory Insurance of Gratuity Fund

The Section 4A of the Payment of Gratuity Act provides for the compulsory insurance of the gratuity fund. However, the notification making this section mandatory should come from the appropriate government. I understand that many states are yet to issue such notifications. In states where such a notification does not exist, linking the gratuity fund to LIC is not mandatory. The procedures under the accounting practices would be sufficient. Even in states where compulsory insurance of the gratuity fund is enforced, the appropriate government shall exempt organizations that have been maintaining an approved gratuity fund and those employing not less than 500 employees with an approved gratuity fund from the operation of this section.

Benefits of Linking Gratuity to LIC

However, linking the gratuity to LIC's death cum gratuity scheme is beneficial to both the employer and employees for various reasons. For example, the employer will be able to pay gratuity without affecting its working capital, and the dependents of a deceased employee will be able to receive superannuation gratuity based on his date of superannuation, provided the same is opted for by the employer, etc.

Compliance with Section 4A

If your state government has not notified the effective date of enforcement of Section 4A, you can continue to maintain your own gratuity fund. On the other hand, if the state government has made it enforceable, you must comply. If the practice is that your employees leave before becoming qualified to receive gratuity, the amount invested by the company in the gratuity fund will become an asset for the company only, and any additions to the fund will be made only after determining the probable liability in terms of gratuity in the coming years. Therefore, do not consider the fund solely as an obligation.

Regards, Madhu. T.K.

Section 4A in The Payment of Gratuity Act, 1972

[4A. Compulsory Insurance.]

(1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain insurance in the manner prescribed, for his 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. Provided that different dates may be appointed for different establishments or classes of establishments or for different areas.

(2) The appropriate Government may, subject to such conditions as may be prescribed, exempt every employer who has already established an approved gratuity fund in respect of his employees and who desires to continue such arrangement, and every employer employing five hundred or more persons who establishes an approved gratuity fund in the manner prescribed from the provisions of sub-section (1).

On this basis, I made the statement.

Please read "with effect from the date as may be notified by the appropriate government," which means that this section pertaining to compulsory insurance shall have effect from the date on which the government notifies it as applicable.

Madhu.T.K

Moreover, in my opinion, even if it is notified by the respective government, it may not be compulsory for employers having fewer than 500 employees.

Regards,
M.V. Kannan

For that separate notification will have to be issued by the appropriate government. In the absence of such notification exempting establishments having more than 500 employees from the operation of section 4A, it shall be construed that such establishments should also have to get their gratuity fund insured.

Madhu.T.K

Dear Sir,

First, you should go through the Payment of Gratuity Act to clearly understand that it is not a part of the employee's salary and should not be shown in the payslip. Please refrain from making inaccurate statements and leading us in the wrong direction.

Thank you.

Madhu,

You have shed correct light on the issue by highlighting sections and subsections of the concerned Act. Many people are confused as to the exact meaning of CTC. The concept of CTC is not well understood. Some companies include gratuity as part of CTC. It should not be shown on the salary slip as a deduction because this amount does not affect the take-home pay of the employee. Using the word "blabbering" is inappropriate.

Thank you.

Thanks to all learned friends for your input. Really, we all professionals have started accepting that the payment of gratuity is a part of our annual salary package or CTC. It's my observation in this forum that many friends don't even bother to open the Bare Act book, at least for reference.

About Section 4 of The Payment of Gratuity Act, 1972

Till date, this section does not give justice to many teachers all over India as many school-college governing bodies, trusts, and NGOs are not registered under the S&E Act. The provision of Section 4 becomes applicable to employees when an establishment, shop, or factory has 10 or more employees working. This is a conceptual conflict among new-generation HR professionals.

Regarding the insurance clause

This was amended in the year 1987.

Compulsory Insurance

The Payment of Gratuity (Amendment) Act, 1987, has prescribed provisions for compulsory insurance for an employer’s liability for payment towards the gratuity under the Act from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956, or any other prescribed insurer. However, employers of establishments belonging to or under the control of the Central Government or the State Government are exempted from the operations of these provisions. (Section 4A)

Applicability of the Payment of Gratuity Act

After a gap of almost 1 year and 9 months, the thread is active again with a comment by Rainbow123. If I am not mistaken (let me take the word of Hramuthan because I am not sure I am right in advising you all, but I believe that I follow the Act (bare Act), interpretations by courts by referring to LLR kind of law reports and cross-check with Labour department officials in case of doubt), I would say that the Payment of Gratuity Act is applicable to factories, plantations, mines, etc., without reference to the number of employees employed. It is also applicable to other establishments like shops and commercial establishments within the purview of the state's Shops and Commercial Establishments wherein at least ten employees were/are employed.

Inclusion of Schools under the Payment of Gratuity Act

A school which is not under the control of the government either by way of service rules and payment of salaries will also come under the fold of this Act. However, until the end of 2009, teachers were not eligible to receive gratuity, and this was supported by the decision of the Apex Court in Ahmedabad Private Teachers' Association Vs. Administrative Officers and Others, (2004 (1) SCR 470), in which the court described that teaching was a noble profession and would not come under the purview of the Payment of Gratuity Act. But in 2009, the definition of employee was amended, and the qualifying phrases of skilled, semi-skilled, etc., were removed. Thereafter, teachers have been brought under the Payment of Gratuity Act.

Compulsory Insurance of Gratuity Fund

Regarding the compulsory insurance of the gratuity fund, I am still unable to see anything wrong in my previous post that this is effective from the date on which the respective state government will notify when section 4A should be made applicable. Therefore, if any state has not notified the date, there is no need to invest the gratuity fund in LIC or another insurance company, as the case may be.