Are Gratuity and Leave Encashment in CTC Fair? Let's Discuss the Impact on Salaries

Discussion on Gratuity & Leave Encashment as Part of CTC

Today, on 29.11.2017, I want to discuss the issue regarding Gratuity & Leave Encashment as a part of CTC. Many employers nowadays include Gratuity & Leave Encashment as part of CTC. It’s a common practice, and due to this, employees suffer from a lower in-hand salary. Here are some typical issues every employer must consider before structuring CTC.

Gratuity

1. CTC means Cost To Company. Is it ethically correct to include Gratuity in CTC before the first 5 years of employment?
2. Some employers claim that Gratuity is also a cost to the company since it is included in CTC. If it is part of CTC, then if employees resign before 5 years or 4 years and 240 days, aren't employers forcing employees to give up their hard-earned money?
3. In India, if we look at the employee turnover rate, it was 26.9% in 2013 and was expected to rise to 27.5% in 2014, with further growth in the coming years. (http://www.thehindubusinessline.com/...cle4791185.ece) As per the turnover rate, we can assume how much money is held by employers as Gratuity till date.
4. Is it not time we should have a unique number for all employees for Gratuity by the Labour Department? Whenever an employee switches jobs, the Gratuity Fund of an employee should also be transferred from the old to the current organization. Will this step lead to the well-being of the working class?

Leave Encashment

5. Including Leave Encashment as a part of CTC, employers show their concern about employees as if they are bonded laborers and do not need any time for their family and society.
6. Employees earn their leave as per provisions in the Factory Act, and employers have no right to make it a part of CTC, as it is earned by the employee.
7. Leave Encashment as a part of CTC lowers the in-hand salary for employees, and it is a trick employers use for their own benefit.
8. Whenever employers pay Leave Encashment, the calculation is made on Basic & DA. But when it comes to deduction for Leave Without Pay, employers deduct it from the Monthly Gross Salary. Is this justifiable?

It is time for employers to think ethically about both these issues. I welcome your valuable thoughts in this regard.

CTC concept was applied in 2004 when Fringe Benefit Tax (FBT) came into existence. It aimed to create a win-win situation for both employees and employers. Prior to its implementation, tax liability for employers ranged from 8% to 32%. By incorporating the costs into the Cost to Company (CTC) structure, employers could show a lower percentage to be paid by them.

However, in 2008 or 2009, the Fringe Benefit Tax was revoked. Consequently, the use of CTC decreased significantly, serving mainly as a tool for employers to understand the total cost of an employee to them. In this concept, employees negotiate based on calculating all the implications.

You can't stop an employer from using the concept of CTC. Since CTC does not come under the purview of any labor law and is agreed upon by the employee, you have no remedy in the matter.

Leave payment is cost-to-company. It is not morally correct to include the cost of gratuity as it will result in a loss to the employee should he/she quit the organization before completing 5 years of service. But what is the use of agreeing beforehand and then raising a query if there is no dispute?

Sir,

According to me, if an employer makes gratuity a part of CTC, then the employer should be liable to pay the deducted amount before completing 5 years as taxable income. However, on the other hand, your proposal is also good if it is handled by the government, like PF.

Dear All,

This is to let you know that "Gratuity" is derived from the Latin term "gratitude," which means to provide in lieu of gratitude. Definitely, the Payment of Gratuity (POG) Act is one of the labor laws in India.

The act states to provide a lump sum amount to eligible employees at the time of separation along with their Full and Final (F&F) settlement.

I would like to state that there have been many case verdicts in favor of employees who have rendered 4.6 years of continuous service and have been paid gratuity. There are two options: first, eligible employees are settled with the gratuity amount at maturity, and the company doesn't mark it as part of Employee's Cost to Company (CTC).

Secondly, there are companies that are making provision of gratuity linked with an LIC plan. They are deducting 4.81% of the basic from Employee's CTC.

Now, the question arises: If the employee has given his consent and acknowledged the offer, then there shouldn’t be any litigation.

With Thanks & Regards,

Bhagat Singh
Asst. Manager - Corporate HR

Dear All,

If XYZ Company's employer claims to have been paying gratuity every month to all employees as part of the salary based on CTC, yet the CTC structure does not mention a 4.81% deduction for gratuity, how can this be justified? The company has not maintained any pro rata if it is indeed paid monthly.

I understand that gratuity is typically paid after an employee resigns from the company and is applicable after completing 5 years of service.

How can an employer justify that they have paid the gratuity in the salary, and is it legal to pay the gratuity while in service? Secondly, can the employer deduct the paid contribution from every salary when clearing the gratuity?

As discussed with you a couple of times, the employer has been paying gratuity every month to all the employees as the salary is based on CTC. However, in the CTC structure, it is not mentioned as a 4.81% deduction of gratuity. The company has not maintained any pro-rata if it is paid every month. I understand that gratuity is paid after resigning from the company and is applicable after completing 5 years with the company.

Legal Aspects of Gratuity Payment

How can an employer justify that they have paid the gratuity in salary, and is it legal to pay the gratuity while in service? Secondly, can the employer deduct the paid contribution in every salary while clearing the gratuity to the resigned employee? Is this all legal?

Please advise on the above queries.

Thank you.

Dear Bhagat Singh Ji, Asst. Manager - Corporate HR,

As you have written, "Would like to state that there have been many case verdicts in favor of employees who have rendered 4.6 years of continuous services and have been paid the gratuity."

Have you gone through any verdict where after 4.6 years of continuous service, gratuity has been paid? If so, please give me details.

Thanks and Regards

Understanding CTC and Its Components

Salaries in our country are quoted in terms of CTC or Cost to Company. CTC is just the cost that the company incurs to employ you and keep you employed. It includes your pay and anything else that the company may incur to keep you in employment. It’s important because a lot of components of your CTC may not translate into actual take-home cash every month. (Kindly keep this in mind)

Key Points Employees Should Understand

- Certain components of CTC may not be cash components.
- Deductions further reduce monthly take-home pay.
- Annualized and variable components (e.g., leave travel allowance (LTA), annual bonus, etc.) are not part of monthly income.

"As per the turnover rate, we can assume how much money is held with the employer as gratuity till date."

No money is held with the employer; it is just figures for the working cost of an employee. CTC per employee is worked out to get employee cost figures, and variations in actual payment take place when an employee leaves without completing 5 years. The gratuity portion gets reduced from calculations. The concept of CTC needs to be understood correctly to appreciate its purpose.

The employer doesn't want to pay the gratuity as per the government norms but keeps saying that the employee has been paid gratuity every month in every month's salary. He has not maintained any prorata if he was paying. Now he says if the person is applicable for gratuity (4.6 years/5 years), he will cut the amount which he has been paid in salary. Can he do that, and is it legal?

Employee is not being paid gratuity every month. Amounts shown in CTC are an indication of expenses that the company is or will have to bear for the employee. Gratuity will become applicable after 5 years of continuous service. Your doubt itself is not clear.

Coverage of the Gratuity Act

The Gratuity Act applies to establishments with ten or more employees, either currently employed or employed on any day in the preceding twelve months, as specified by the Central Government through notification. Gratuity is payable upon the separation or termination of an employee's employment (due to superannuation, retirement, resignation, death, or disablement caused by an accident or disease) once the employee has provided continuous service for at least five years.

Subject to the provisions of sub-section (2), the employer is required to obtain insurance in the prescribed manner for their liability for payment towards gratuity under this Act. This insurance must be obtained 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. There is no provision for the employer to pay gratuity in monthly installments.

I hope this helps clarify the information regarding gratuity under the Act. Let me know if you need further assistance.