Legal Dilemma: Can Gratuity Be Included in CTC? Let's Discuss

Dear Member,

Is it legal to show gratuity as a part of CTC?

Thank you.

You need to first understand what CTC is. CTC is a concept; it is the cost to the company of an employee. The employer has to make provisions for gratuity payment for every employee employed by him. He has to create a fund for gratuity or opt for a gratuity policy for which he has to pay a premium. Therefore, it is a cost to him, and accordingly, he can add this cost to the CTC. There is no wrong in doing so.

However, a question may arise that if an employee leaves his service before completing 5 years, the amount taken into CTC towards gratuity is to be refunded to the employee or not. In the draft code on social security, there is a provision for the employer's contribution towards the gratuity fund.

Dear Friend,

In the early 2000s, Gratuity was not part of CTC. However, afterward, industries started adding it to the package to encourage employees to stay back.

Regards,
Y.R. Shirke

Understanding Gratuity as a Statutory Right

Gratuity is a statutory right of an employee who completes 5 years in the same organization and is a terminal benefit. The cost is to be borne by the employer and not the employee. Gratuity cannot be a part of CTC. If a company is making it a part of CTC, you can raise the issue before the controlling authority. A legal notice from a common lawyer representing all employees may be sufficient to emphasize the importance of this issue and prompt the release of the entire payment. Failure to release the payment may be considered a minor fraud.

Eligibility for Gratuity Payment

However, you are eligible to receive the gratuity amount even if you have not completed 5 years of service. The amount paid by the company to the Group Gratuity Insurance Scheme is accumulated, and LIC pays interest on it. This fund is established to ensure the payment of gratuity to employees in case of death or disability. If this fund is not established, the company must cover the cost from its own resources.

Payment Process and Obligations

Additionally, in the event of termination or resignation of an eligible employee, the payment is made from the fund, and the remaining amount continues to earn interest. After 5 years, the company is obligated to make a payment based on the gratuity formula. Considering the monthly contributions (either shown as part of CTC or collected from the employee), the total amount may exceed the calculated gratuity amount.

Gratuity in CTC and Tax Implications

Companies that include gratuity as part of CTC provide the payment as a tax rebate or Ex. Gratia in the Full and Final settlement, even if an employee leaves before completing 5 years (or at 4 years 8 months or 6 months, as the case may be).

Dear friends, the query is about the legality of showing gratuity as part of the CTC of an employee or otherwise. In the first place, the element of legality or illegality comes into play only when anything is done or not done according to the provisions of any law, either express or implied. As rightly observed by our learned member Mr. Korgaonkar, CTC is a concept adopted by the employer in the matter of compensation packages to employees. It is simply an index or accounting aid showing the overall expenses incurred by the employer per employee per annum in the matter of wage/salary fixation or any negotiation connected therewith.

Gratuity as Part of CTC

Gratuity, being a terminal benefit legally payable to an employee subject to the fulfillment of certain conditions of his/her service as well as exit, is certainly a part of the cost of employment incurred by the employer. So, adding the annual contribution of gratuity to CTC cannot be an infraction of any sort, either legal or ethical, in relation to the realm of employment, as no monetary contribution is made by the employee. Even the statutorily mandated employee contributions like ESIC and EPF do not affect the status of the employer's contribution in this regard as an expense incurred by him.

Dear Umakanthan ji, thank you very much for your support of my contention. There are very few members in this forum who can be counted on fingers to write logically and correctly, and you are one of them. I sometimes feel regret responding to the queries of the members, but when I receive support from members like you, I feel boosted.

Distinguishing Between Salary and CTC

I also regret noticing that in the HR fraternity, many of our brothers and sisters are unable to distinguish correctly between Salary and CTC. This forum has been a platform for discussing CTC extensively.

I still do not get it. Where in the Gratuity Act does it mention that it can be a part of the CTC?

Anyhow, I believe I am getting ripped off.

I think that you would not have any difficulty in understanding the fact that CTC is a conceptual aid to determine or assess the employer's overall financial liability toward every hired position or job, including salaries/wages and all other fringe benefits payable per employee per year. The various heads of such payments comprise all statutory and non-statutory items. Every statutory payment, both direct and indirect like the employer's contribution to EPF, ESI, etc., including its mode and method, has to be done not less than the norms prescribed in the respective statute. It is not the concern of the statute to assess the overall financial commitment of the employers. You will not find the term "Cost To Company" in any Labour Law. It is only a presumptive assessment for the guidance of the employer and employees concerned for deciding the acceptable compensation package.

Dear Umakanthan sir,

If CTC includes gratuity and the employee has not completed the 5-year service period, then in this scenario, will the said employee not receive the gratuity regardless of its inclusion in CTC?

Please clarify.

Thanks,
Amit

Dear Amit, CTC comprises all expenses incurred by the employer towards the employment of the employee for their retention in the job as well as for the normal termination of their employment. As you are well aware, gratuity is a one-time lump sum terminal benefit strictly governed by the provisions of the Payment of Gratuity Act, 1972. Except in cases of death and disablement, eligibility for gratuity upon termination of employment arises from completing continuous service of not less than five years. Section 4-A of the Act mandates compulsory insurance for gratuity. The annual premium for insurance is calculated solely on an actuarial basis by the insurer and paid by the employer. Consequently, it automatically becomes part of the CTC regardless of whether the employee is ineligible to receive it due to not meeting the minimum qualifying service requirement.

According to one of the government circulars, it cannot be. I will find and attach it here as soon as possible.

Dear colleagues,

The concept of CTC

The concept of CTC is coined by the employer to determine what it costs to hire an employee. The question of legality or otherwise is irrelevant and not applicable. The payment of gratuity prior to law and after is meant to induce employees to stay longer. But if he leaves before completing five years' service, he chooses to forgo gratuity. It is not the employer's fault. Therefore, including gratuity in CTC is well within the employer's prerogative.

Regards, V.L. Nagarkar HR Consultant

Dear Mr. Amit,

To the best of my understanding, you are saying that once the gratuity is considered in CTC while giving employment to the new employee, then the said amount should be given to the said employee irrespective of whether he has completed 5 years or not. Principally, it should be paid; however, certain industries do not pay under the shelter of the 5 years condition.

Employees should not be attracted by the amount of CTC. They should ignore the amounts shown as employers' contribution to PF, ESI, Gratuity, conveyance, food, etc. They should consider the amounts other than employers' contribution or expenses for employees as the salary. Then the question of refund of gratuity won't arise. The CTC is not recognized as a legal wage under any labor legislation in India.

Agreed with KORGAONKAR K A's views that Gratuity is part of CTC. Any payment, whether made directly or indirectly by the company in the name of the employee, should be added and considered part of CTC. However, the payment is only subject to completion of the terms and conditions applicable.

Thanks & Regards,

Sumit Kumar Saxena

The Impact of CTC on Indian Accounting Standard 19

The CTC has a direct bearing on Indian Accounting Standard 19, issued by the Institute of Chartered Accountants/Government of India, which deals with employee-related costs. Every employer should account for all employee-related expenses/costs relevant to the year in the respective year's accounts, whether paid or not, but on an accrual basis in accordance with AS-19. On the same principle, the CTC is also computed in many firms. Of course, various methodologies are followed by employers as per their own past practices, HR policies, and patterns generally followed by other companies in the same field. It is possible they show a few items in CTC exchanged with the candidates which may vary from what is accounted for in their accounts as "Employees' Benefits." It's also possible that it varies from person to person. Since the CTC concept is not present and mandatory as per the Payment of Wages Act, etc., no one can argue what is included and what is kept outside the ambit of CTC. The extract from AS-19 is reproduced here for the benefit of members as a ready reference. Detailed AS is attached.

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Indian Accounting Standard (Ind AS) 19 Employee Benefits

5) Employee benefits include:

(a) Short-term employee benefits, such as the following, if expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related services:
(i) Wages, salaries, and social security contributions;
(ii) Paid annual leave and paid sick leave;
(iii) Profit-sharing and bonuses; and
(iv) Non-monetary benefits (such as medical care, housing, cars, and free or subsidized goods or services) for current employees;

(b) Post-employment benefits, such as the following:
(i) Retirement benefits (e.g., pensions and lump sum payments on retirement); and
(ii) Other post-employment benefits, such as post-employment life insurance and post-employment medical care;

(c) Other long-term employee benefits, such as the following:
(i) Long-term paid absences such as long-service leave or sabbatical leave;
(ii) Jubilee or other long-service benefits; and
(iii) Long-term disability benefits; and

(d) Termination benefits.

6) Employee benefits include benefits provided either to employees or to their dependents or beneficiaries and may be settled by payments (or the provision of goods or services) made either directly to the employees, to their spouses, children, or other dependents, or to others, such as insurance companies.

7) An employee may provide services to an entity on a full-time, part-time, permanent, casual, or temporary basis. For the purpose of this Standard, employees include directors and other management personnel.

Definitions

8) The following terms are used in this Standard with the meanings specified:

Definitions of employee benefits: Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.

Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment.

Other long-term employee benefits are all employee benefits other than short-term employee benefits, post-employment benefits, and termination benefits.

Termination benefits are employee benefits provided in exchange for the termination of an employee's employment as a result of either:

(a) An entity's decision to terminate an employee's employment before the normal retirement date; or
(b) An employee's decision to accept an offer of benefits in exchange for the termination of employment.

Xxxxxxxx xxxxxxxxxxxxxxxxxx

Dear,

"CTC" itself is not a legal word, so it depends on the company what components they add to CTC or not.

The gratuity is shown in CTC. If an employee leaves the company before the 5-year period, should the employee pay the accrued amount or not!

Dear Murali, hope your query stands clarified from the reply and attachments given by Korgaonkar Sir. However, to set the record straight, as per Section 4(1) of the Payment of Gratuity Act 1972, the liability to pay gratuity arises only after continuous service of five years. In other words, before the completion of the eligibility period of five years, even if the CTC mentions gratuity as having accrued all along, there is NO legal liability to pay gratuity. Nonetheless, the employer can still pay the accrued amount as a welfare measure, but the Income Tax exemption would not apply, and it will be treated as income to the recipient.

PS. Please be mindful before sending any query. The gratuity is shown in CTC, and if an employee leaves the company before the 5-year period, whether the employee should pay the accrued amount or not.

Thank you.

Understanding the Cost to Company (CTC)

Business is a game of costs, which ultimately ends up with either profit or loss. The Cost to Company (CTC) is nothing but a hypothetical cost that includes everything we receive directly or indirectly, whether in cash, kind, or services.

Gratuity as a Business Cost

Gratuity is one of the costs that has to be incurred per employee by the business on completion of terms as envisaged under the law. This amount is paid by the business but is not a charity by the proprietor.

Eligibility for Gratuity

Now, will the employee receive any amount if they leave the job before becoming eligible for gratuity? Is there any deduction from their monthly salary towards gratuity? If not, then the answer is no.

I hope this clarifies your doubts.

Dear all,

Of course, it's a repeated subject matter, but still, I feel there should be legislation to favor the employees so that taking shelter under the provisions of the Gratuity Act should be done away with.

It's obvious that every employee's gratuity due on completion of one year of continuous service is taken for the purpose of CTC and accounted in the firm's books as a 'Liability towards the employee' on an accrual basis. But at the same time, when the very same employee leaves the firm without completing 5 years of continuous service, he/she is neither paid what gratuity is accounted for due for his service nor transferred to the subsequent employer like EPF for the simple reason that the Gratuity Act does not provide for such an arrangement. Thus, the employer writes back the unpaid gratuity which, in effect, is "an unjust enrichment" in the eye of the law and gets the benefit. In this way, the employee is deprived of his just due, which is against the principle of natural justice. I strongly feel all the labor/employees' organizations should write to the Government of India and build up a strong case for bringing in an amendment to this provision paving the way at least to transfer the accrued gratuity to the next employer if and when he/she joins another firm/employer like being done in the case of EPF.

Dear Kumar ji, there is already a demand by unions to remove the conditions requiring (i) at least 10 employees in an establishment and (ii) a minimum of five years of service for the payment of gratuity. Additionally, there are recommendations and proposals to eliminate the 5-year service clause for gratuity eligibility and to allow the transfer of gratuity benefits when an employee changes jobs.

According to the draft code on Social Security and Welfare, gratuity will become contributory. Every employee will contribute 2% towards gratuity, and the accumulation will be transferred when the employee changes jobs.

Gratuity Administration Modifications

We have been reading about certain modifications in gratuity administration, both in the government and private sectors, proposing an automatic revision in the upper limit of gratuity linked with wage levels by a new formula. Currently, the limit has been increased from 10 lakhs to 20 lakhs. Additionally, in the Pay Commission recommendations, this formula is being emphasized for automatic revision. Learned members are encouraged to discuss this further. However, I have not observed any tangible progress in the direction indicated above by Mr. Keshav.

If the Gratuity is considered as part of CTC and Salary is reduced to the extent of Gratuity deduction, no employee will ever want to complete 5 years for the sake of the extra benefit of Gratuity. When an employee is leaving the company, the deduction will automatically be credited in FnF as Exgratia. Doesn't the Gratuity payment lose its value as it doesn't even matter if it's paid after 5 years or before 5 years.

If CTC is a part of gratuity, and the employee has left the job before 5 years, will the employer pay the gratuity amount in full and final settlement or not? This is important to clarify as the employer deducts gratuity from our package.

Thank you.

Dear Devendra,

In fact, your question reflects the general confusion prevailing in the minds of employees whose compensation package is shown by the employers in the CTC format. Once again, it is to be reiterated and remembered that CTC is only an accounting tool projecting the overall annual expenses to be incurred by the employer in respect of the employee. Both in content and form, it is a mere statement of the total annual cost of employment per employee—that's all. As such, it implies that the items payable actually in the form of money and/or to be extended in the form of benefits, which can be computed in terms of money, would materialize only on the fulfillment of the conditions by the employee, either statutory or contractual.

If analyzed in this backdrop, the actuarial contribution made by the employer to a gratuity fund is an expense from his cost perspective and therefore only shown in the package. No contribution to gratuity is deducted from your monthly salary. Even then, you are entitled to it only when you complete not less than five years of continuous service as stipulated in the PG Act, 1972.

If you are still confused, think of CTC like a budget for the employee. If some part of the budgeted expense is not spent (like gratuity not legally due), will the company still give it? Not really. It will become a positive/favorable variance in the budget.