CTC
Content
Q 1 In a interview HR manager chief asking what is your CTC in previous employment. What are the element involve in CTC. How to negotiate present CTC, by HR manager with interview candidate make the relevant assumption without fail. ANS. Cost to Company (CTC) is a term used to describe an investment without return. Travel expenditures, interviewing, spending time with potential customers can all be interpreted as CTC's. Cost to Company can also be used to refer to the total cost that an organization is spending towards their employee including the Salary, Perks, Cost related to benefits, Cost related to hiring, Training, Retirals, Statutory Contributions etc. Here is more input: Cost to Company is a buzz word to describe how the company can slowly pay you less and less, and remove all your benefits, until you are "self funded" - in other words you pay for all your "benefits" yourself, while the company receives the tax benefits for these payments. This improves their profit ratio, and if this system is extrapolated, you will eventually pay the company to work there. So you'll need a second job to fund this. :-) CTC - Cost to company is a trick of a company and HR department, to show we are paying a big salary, but unfortunatly it is just bubble. They overload total expences of human resorces on salary, and show that they are paying this much salary to the staff. but actualy they pay less and show more. For example....your salary is 6.00 Lacs p.a. Means ... you are getting 50,000/- per month. But actuly person gets only 25,000/- per month...all other money is deducted for facilities.. Means we are paying for getting facilities, but company shows they are giving us good facilities in the organization. In short, we pay from our salary for getting facilities, but company says they are giving good facilities to there staff. So you are paying for even unwanted facilities
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which you dont need. Before deciding CTC, ask for breakup of facilities.
CTC is Cost to Company and CTC is always the annual package..CTC is always the gross that company gives you it includes PF, Gratuity and other deductions..CTC is not in hand salary. The contents of the salary break up is as below, you can prepare it at the suitability of your own. HRA would be 50 or 60% of basic. These are : • Basic • Dearness Allowance (DA) • Incentives of bonuses • Conveyance Allowance • House Rent Allowance (HRA) • Medical Allowance • Leave Travel Allowance of Concession (LTA / LTC) • Vehicle Allowance • Telephone / Mobile Phone Allowance • Special Allowance All the above are a part of your in-hand salary, and therefore, are a part of your CTC pay as well. All-expenses paid holidays abroad, annual company picnics, free iPods... Today's employee leads a charmed life by all accounts. But it's a HR nightmare for employers - high growth rates and zooming investments have led to manpower shortages across sectors and hierarchies. Attrition rates, even in old economy companies, have gone up, and companies are desperately offering the moon to woo or retain talent. And employees know that, and are more than happy to drive a hard 2
bargain and get a couple of stars thrown in as well. The Indian job scene has never been better. Global HR firms estimate pay increases of 14-16 per cent in India in 2006, the highest in the Asia-Pacific region. A Mercer Human Resource Consulting's survey of 70 countries predicted an average global pay rise of 2.4 per cent, with India topping the chart with a 7.3 per cent raise (over and above the inflation rate). And according to a Hewitt Associates' study, the attrition rate in India crossed the 13 per cent mark last year. "In the last two years, salaries have increased by 50 per cent in cities like Chennai, even at the midlevel, in the software and the manufacturing sectors," says Satish Rao, director, Reach Global, HR and staffing consultants. "Attracting and retaining talent is by far the greatest challenge that employers are facing. While this holds true at all levels, the impact particularly in the service sector - is most at middle and senior profiles as employees at these levels are critical for ramp up and growth," says Padmaja Alaganandan, principal consultant, Mercer Consulting. Clearly, the race to woo skilled people is getting frenzied. Companies are forced to out-bid competitors, offer attractive salaries and extras, and throw in freebies as well, if they want to retain existing talent and attract fresh ones. Which is why ESOPs (employee stock option plans), sign-on and retention bonuses, cash rewards, and softer advancement incentives are making a comeback. We take a look at what's available and how you can use this to your advantage when you negotiate with your present or prospective employers. Why there is huge difference between take home salary and CTC? You would have seen this many times that even if your package (CTC) is 6 lakhs per annum and hence monthly income INR 50,000, you only receive about INR 30-35,000 as your monthly take home pay.
This is because CTC is actually a sum total of various components as mentioned above and not all of them are given to you on monthly 3
basis in your hand. Some of them like Gratuity, Employer provident fund and Superannution benefits are added to your long term savings account but do not form part of take home pay. The other reason of reduced take-home pay is the income tax that is deducted at source itself i.e. by your employer. Let us understand the meaning of various components here: 1. Direct benefits: They are paid to you monthly and form part of
your take home subject to income taxes. The terms are quite self explanatory and hence i am not writing about them here. 2. Indirect Benefits: These are the benefits that you enjoy
without paying for them. Your company takes care of them but add their monetary value to your CTC. Off course it is an expense for the company and hence could be added to CTC.
a) Interest free loans, if any: If your company is providing you interest free loans for buying a car or a house or any other need, they are definately NOT doing a charity. They ususally add the monetary value of the interest benefit that you will get out of NOT paying it, to your CTC. I have seen it in many CTC packages that are offered by banking companies. They allow their employees to get car or home loans at highly subsidized rates and then add the amount equal to the difference between the market and subsidized interest rate in their CTC. So, if you don't take the loan, you won't get this benefit but it is anyway added to your virtual CTC. b) Food Coupons / Subsidized meals: Most of the big companies offer free lunch and evening snacks at workplace. Do you think these are FREE? No way, you would certainly find them added in your CTC. So, you won't 4
get this amount in hand even if you don't opt for eating in their cafeteria!! This reminds me of one proverb "No lunch is FREE in this world".
c) Company Leased Accomodation: This benefit saves you
from the tension of finding a home and negotiating on rent deals. Your company provides you with home and pays rent to the landlord directly. But, will add the monetary value of this benefit to your CTC which is normally the rent and furniture cost that it has incurred. d) Medical and Life Insurance premiums paid by
company: So you are covered under group medical and life insurance scheme taken by your employer? Sounds good as these policies give you much better and comprehensive cover over the individual ones. But they do come at a cost to your company and that cost is obviously is included in your CTC. You will never be asked to pay premium but in reality, you would have paid it!
e) Income tax savings: Sometimes companies offer you
some benefits which are tax free for you but are taxable for them. For example, if you receive per diem allowances, they are subjected to FBT (Fringe benefit tax) and it is paid by your employer and not you. But some companies do add the value of tax that you saved and they paid in your CTC. Office Space Rent: This is the most weird component but a real one. You must have heard about FAT pay packages that people graduating from IIM (Indian Institute Of Management) receive. They run into several lakhs of rupees at the fresher level itself but if you carefully look at the breakup, they do include this component.
i.
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For example, if the company is spending INR 7000 per month on the cubicle that you would sit in, they would add the yearly cost of this in your CTC. This means that INR 84,000 (12*7000) will form part of your pay package even though you will never get it!! f) Saving Contributions: They are contributions made to your long term savings account by your employer. They do not form part of your monthly take home but belong to you and you may or may not get them in long term. Superannuation Benefits: These are long term pension type schemes mostly offered by multinational companies. A predefined amount is contributed every month in your superannuation account and you can withdraw it after you retire or leave the organization. Most of the companies do not directly give you cash on separation but do give you an option of converting them into some kind of insurance policies. So, it is an indirect benefit.
i.
Employer Provident fund Contribution: This forms part of your CTC and your employer contributes about 12% of basic salary every month. This amount keeps accumulating in your PF account and you can withdraw it at the time of leaving the company. This is paid out as cash on withdrawala along with the accrued interest.
ii.
iii.
Gratuity: Again, forms part of your CTC but is added to your gratuity account annually. Also, this has a time limit of 5 years attached to it. If you leave the company anytime before 5 years, you will NOT get anything from your earlier year's accumulation of this amount. So, make sure you serve a company for at least 5 years to enjoy your Gratuity.
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Q2 Calculation of gratuity. In case of employee disputes what are the remedial measures from government. what are the remedial measures form government, Make relevant decision. ANS Gratuity act 1972 Gratuity is one of the least understood components of salary. Investment Yogi explains everything about Gratuity and the tax implications for you. Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement. Formula Used : Gratuity Calculation In India = [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26 Where, D.A = Dearness Allowance. Eligibility As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer. 7
How does it work? An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme. Tax treatment of gratuity The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail. For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories – (a) Government employees and (b) Non-government employees covered under the Payment of Gratuity Act, 1972 (c) Non-government employees not covered under the Payment of Gratuity Act, 1972 In case of government employees – they are fully exempt from receipt of gratuity. In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) 15 days’ salary for each completed year of service or part thereof Note: •
Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). 8
•
•
‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored. Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) Half-month’s average salary for each completed year of service (no part thereof) Note: • •
•
Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored. Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10
Illustration Let’s understand the above math clearly with an example: Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.
Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972. 9
• •
Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2
Important points to remember • • •
•
•
Generally, only government employers give DA to their employees. Above example is only for illustrative purpose. The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors. In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 350,000. Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 350,000 will be reduced by the amount of deduction already claimed in the previous years. In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season. 10
Government Measures An employee should have minimum service of 5 years to earn gratuity while for pension he has to put in a minimum service of 10years. If he resigns for reasons other than to take up another employment in Government, he forfeits his right for gratuity. The maximum gratuity payable is 16 ½ months emoluments for the maximum of 33 years of service and for lesser service it is proportionately paid as per Pension Rule.45.
5.3 If a Government employee dies while in service his family is entitled to the gratuity as follows:Qualifying service 1. Less than one year the time of death
Rate 2 times the emoluments drawn at
2. One year and above the but less than 5 years
6 times the emoluments drawn at time of death
3. Five years and above the but less than 20 years
12 times the emoluments drawn at time of death.
4. 20 years and above completed
½ months emoluments for each
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six monthly period subject to a maximum of 33 monthly periods. Subject to a ceiling of Rs.1,00,000 from 14.12.1987, Rs.2,50,000 from 01.04.1995 and Rs.3,50,000 from 01.01.1996 Rule 45.(1b) G.O.448 Fin 07.07.1995, 124 Fin 21.02.1995, 138 Fin 25.03.1997, 174 Fin 21.04.1998. 5.4 In the case of retirement of a Government employee after 01.10.1979 and after completing 5 years of qualifying service, the amount of retirement gratuity shall be ¼ of his emoluments for each completed six monthly period of qualifying service subject to a maximum of 16 ½ times the emoluments subject to maximum of Rs.30,000 upto 31.05.1982, Rs.36,000 upto 30.09.1984 and 50,000 upto 14.12.1987 and 1,00,000 upto 31.03.1985 and Rs.2,50,000 upto 31.12.1995 and Rs.3,50,000 from 01.01.1996 Rule 45(1c) G.O.682 Fin 21.10.1982, 1004 Fin 13.08.1985, 124 Fin 21.02.1995, 138 Fin 25.03.1997, 174 Fin 21.04.1998. In the case of a Government servant who retires on or after 01.04.2003, 50% of the Death-cum-Retirement Gratuity is paid in cash and the balance of 50% in Small Savings Certificate. (G.O 75 Fin Dated 19.03.2003). Subsequently, the Government have directed that the payments of Death-cum-Retirement Gratuity to the State Government employees at the time of retirement shall continue to be made in cash in full even after 01.04.2003. (G.O 218 Fin Dated 27.06.2003). Emoluments include pay, Special pay, Personal pay and Dearness Allowance on date of retirement. 5.5 If a Government employee dies within 5 years from the date of retirement from service and become eligible for service gratuity or pension and received gratuity, or pension or commuted pension and such 12
amount received is less than the amount equal to 12 times of his emoluments his family shall be eligible for a residuary gratuity equal to the deficiency. Rule 45(2).
5.6
Nomination
The Government employee has to make a nomination conferring on one or more persons the right to receive the gratuity in accordance with the order of priority on the members of family. The family for purpose of gratuity will be in the order of : 1.
Wife, Wives, judicially separated wife or wives
2.
Husband, judicially separated husband
3.
Sons, step sons, Adopted sons
4. Unmarried Adopted daughters
Daughters,
Step
daughters,
5. Widowed daughters, Step daughters, Adopted daughters 6.
Father, Adoptive parents
7.
Mother, Step mother, Adoptive parents
8.
Brothers, below age of 18 years, step brothers
9. sisters
Unmarried sisters, widowed sisters, step
10.
Married daughters
11.
Children of predeceased son ( Rule 45(5) ).
If the deceased employee was a Divorcee without an issue, the gratuity shall be payable to other members 13
of the family but no family pension will be paid. Letter 135030/86-2 17.11.1987 Only the nominee as per nomination is entitled to receive the gratuity and the person included in the succession certificate is not eligible unless there is a court decree or order with the Government impleaded in the suit. Non members of family mentioned in the succession certificate is not entitled to receive the gratuity. Letter 135030/86-2 Fin 17.11.1987 If there is no nomination, then the order of priority for payment of the gratuity will be (a) items 1 to 4 of Rule 45(5) in equal shares ; (b) If items 1 to 4 are not alive then items 5 to 11 in equal shares. 5.7 If the nominee is a minor, then the gratuity shall be paid to the guardian of the minor on production of guardianship certificate. Rule 46(4). 5.8 If any surviving member of the Government employee’s family who is eligible to receive the gratuity due to the deceased employee has not been heard of by those who would have heard of him/her the share due to such person shall be paid to the surviving parent if such a persons is a minor for being paid as and when he/she is traced. If the person is a major the share shall be paid to items 1 to 4 mentioned in para 6.6 for being paid to him or her as and when the person is traced. If such a person has not been heard of for a period of 7 years, the person shall be deemed to be dead and the family members under items 1 to 4 mentioned in para 6.6. have to share it equally. Rule 46(e). 5.9 If a member of family of the deceased Employee who is eligible to receive the gratuity by virtue of Rule 46, is charged with the murder of the employee or abetting of such crime, his claim remains suspended till the conclusion of the criminal case. If he is convicted of the offence, his claim is barred and the amount will be paid to the other eligible members. If he is acquitted of
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the charge his share will be paid to him Pension Rule 46(A).
5.10 Lapse of Gratuity Where a Government employee dies while in service or after retirement without receiving the gratuity amount and if has no family or has not made nomination or there is no subsisting nomination, the gratuity due will be lapsed to Government. Rule 47.
5.11 Anticipatory Gratuity If a Government employee has to retire before the gratuity could be finalised, the Accountant General can determine the gratuity to which the employee is entitled and authorise anticipatory gratuity restricted to 80% of such determined amount and in case there is an excess payment found while finalising,, the pensioner has to refund the excess.( Rule 59 ).
5.12 Provisional Gratuity If any departmental or judicial proceedings are pending against the employee and he is permitted to retire pending such proceeding, gratuity shall not be paid to him until such proceedings are finalised and order issued. ( Rule 60(1c) ) However if there is any possibility of administrative delay in finalising the proposals, and forwarding them to the Accountant General, the Head of the Department or Head of office has to sanction Provisional Gratuity at 100% of admissible amount to Nongazetted Officials and 80% to Gazetted Officials after deducting the dues. G.O. 467 Fin 25.05.1977. 15
5.13 Gratuity shall not be withheld in respect of a Government employee, who has been permitted to retire pending departmental / judicial proceedings against him, where such proceedings are only for administrative lapses not involving any pecuniary loss to Government (G.O.286 Fin 07.04.1995 Rule 60(1c) and 69(1b). 5.14 Interest for Belated Payment of Gratuity As per G.O. 1475 Fin 23.11.1973, an interest @ 8% per annum has to be paid to retired person if the gratuity amount remained unpaid for more than 2 months from the date of retirement if the individual was not at fault or disciplinary proceedings are not pending against him. In G.O. 517 Fin 12.06.1987 and 527 Fin 15.06.1987 and 818 Fin 01.12.1988 the interest rate was modified as delay beyond 3 months but upto one year @ 7% per annum and delay beyond one year @ 10 % per annum. In G.O. 122 Fin 20.02.1995 the interest rate was ordered @ 12% compounded annually. The delay in administrative office, A.G.s. Office are covered for payment of interest when the delay could not be attributed to the individual. A.G.s authorisation is not necessary for payment of interest. Head of Office has to claim and pay the interest to the individual after getting orders of Government. In case of arrears of gratuity arising on revision of emoluments interest has to be paid for delays beyond 3 months. In case of compulsory retirement, voluntary retirement, death of employee interest shall be paid for delays beyond six months. Letter 103354 / 87 – 2 Fin 07.09.1987. In respect of cases instituted, Gratuity is withheld till conclusion of disciplinary proceedings -
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a) If a Government servant is exonerated of all the charges and where gratuity is paid on conclusion of such proceedings and payment is made beyond three months from the date of retirement, interest shall be allowed; b) In cases where the Government servant is not fully exonerated on conclusion of disciplinary proceedings and if the payment is delayed, in such cases interest shall be allowed for the period of delay beyond three months from the date of issue of orders by competent authority following payment of gratuity. (Lr. 31397/Pension/91 Fin 10.05.1991.)
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which you dont need. Before deciding CTC, ask for breakup of facilities.
CTC is Cost to Company and CTC is always the annual package..CTC is always the gross that company gives you it includes PF, Gratuity and other deductions..CTC is not in hand salary. The contents of the salary break up is as below, you can prepare it at the suitability of your own. HRA would be 50 or 60% of basic. These are : • Basic • Dearness Allowance (DA) • Incentives of bonuses • Conveyance Allowance • House Rent Allowance (HRA) • Medical Allowance • Leave Travel Allowance of Concession (LTA / LTC) • Vehicle Allowance • Telephone / Mobile Phone Allowance • Special Allowance All the above are a part of your in-hand salary, and therefore, are a part of your CTC pay as well. All-expenses paid holidays abroad, annual company picnics, free iPods... Today's employee leads a charmed life by all accounts. But it's a HR nightmare for employers - high growth rates and zooming investments have led to manpower shortages across sectors and hierarchies. Attrition rates, even in old economy companies, have gone up, and companies are desperately offering the moon to woo or retain talent. And employees know that, and are more than happy to drive a hard 2
bargain and get a couple of stars thrown in as well. The Indian job scene has never been better. Global HR firms estimate pay increases of 14-16 per cent in India in 2006, the highest in the Asia-Pacific region. A Mercer Human Resource Consulting's survey of 70 countries predicted an average global pay rise of 2.4 per cent, with India topping the chart with a 7.3 per cent raise (over and above the inflation rate). And according to a Hewitt Associates' study, the attrition rate in India crossed the 13 per cent mark last year. "In the last two years, salaries have increased by 50 per cent in cities like Chennai, even at the midlevel, in the software and the manufacturing sectors," says Satish Rao, director, Reach Global, HR and staffing consultants. "Attracting and retaining talent is by far the greatest challenge that employers are facing. While this holds true at all levels, the impact particularly in the service sector - is most at middle and senior profiles as employees at these levels are critical for ramp up and growth," says Padmaja Alaganandan, principal consultant, Mercer Consulting. Clearly, the race to woo skilled people is getting frenzied. Companies are forced to out-bid competitors, offer attractive salaries and extras, and throw in freebies as well, if they want to retain existing talent and attract fresh ones. Which is why ESOPs (employee stock option plans), sign-on and retention bonuses, cash rewards, and softer advancement incentives are making a comeback. We take a look at what's available and how you can use this to your advantage when you negotiate with your present or prospective employers. Why there is huge difference between take home salary and CTC? You would have seen this many times that even if your package (CTC) is 6 lakhs per annum and hence monthly income INR 50,000, you only receive about INR 30-35,000 as your monthly take home pay.
This is because CTC is actually a sum total of various components as mentioned above and not all of them are given to you on monthly 3
basis in your hand. Some of them like Gratuity, Employer provident fund and Superannution benefits are added to your long term savings account but do not form part of take home pay. The other reason of reduced take-home pay is the income tax that is deducted at source itself i.e. by your employer. Let us understand the meaning of various components here: 1. Direct benefits: They are paid to you monthly and form part of
your take home subject to income taxes. The terms are quite self explanatory and hence i am not writing about them here. 2. Indirect Benefits: These are the benefits that you enjoy
without paying for them. Your company takes care of them but add their monetary value to your CTC. Off course it is an expense for the company and hence could be added to CTC.
a) Interest free loans, if any: If your company is providing you interest free loans for buying a car or a house or any other need, they are definately NOT doing a charity. They ususally add the monetary value of the interest benefit that you will get out of NOT paying it, to your CTC. I have seen it in many CTC packages that are offered by banking companies. They allow their employees to get car or home loans at highly subsidized rates and then add the amount equal to the difference between the market and subsidized interest rate in their CTC. So, if you don't take the loan, you won't get this benefit but it is anyway added to your virtual CTC. b) Food Coupons / Subsidized meals: Most of the big companies offer free lunch and evening snacks at workplace. Do you think these are FREE? No way, you would certainly find them added in your CTC. So, you won't 4
get this amount in hand even if you don't opt for eating in their cafeteria!! This reminds me of one proverb "No lunch is FREE in this world".
c) Company Leased Accomodation: This benefit saves you
from the tension of finding a home and negotiating on rent deals. Your company provides you with home and pays rent to the landlord directly. But, will add the monetary value of this benefit to your CTC which is normally the rent and furniture cost that it has incurred. d) Medical and Life Insurance premiums paid by
company: So you are covered under group medical and life insurance scheme taken by your employer? Sounds good as these policies give you much better and comprehensive cover over the individual ones. But they do come at a cost to your company and that cost is obviously is included in your CTC. You will never be asked to pay premium but in reality, you would have paid it!
e) Income tax savings: Sometimes companies offer you
some benefits which are tax free for you but are taxable for them. For example, if you receive per diem allowances, they are subjected to FBT (Fringe benefit tax) and it is paid by your employer and not you. But some companies do add the value of tax that you saved and they paid in your CTC. Office Space Rent: This is the most weird component but a real one. You must have heard about FAT pay packages that people graduating from IIM (Indian Institute Of Management) receive. They run into several lakhs of rupees at the fresher level itself but if you carefully look at the breakup, they do include this component.
i.
5
For example, if the company is spending INR 7000 per month on the cubicle that you would sit in, they would add the yearly cost of this in your CTC. This means that INR 84,000 (12*7000) will form part of your pay package even though you will never get it!! f) Saving Contributions: They are contributions made to your long term savings account by your employer. They do not form part of your monthly take home but belong to you and you may or may not get them in long term. Superannuation Benefits: These are long term pension type schemes mostly offered by multinational companies. A predefined amount is contributed every month in your superannuation account and you can withdraw it after you retire or leave the organization. Most of the companies do not directly give you cash on separation but do give you an option of converting them into some kind of insurance policies. So, it is an indirect benefit.
i.
Employer Provident fund Contribution: This forms part of your CTC and your employer contributes about 12% of basic salary every month. This amount keeps accumulating in your PF account and you can withdraw it at the time of leaving the company. This is paid out as cash on withdrawala along with the accrued interest.
ii.
iii.
Gratuity: Again, forms part of your CTC but is added to your gratuity account annually. Also, this has a time limit of 5 years attached to it. If you leave the company anytime before 5 years, you will NOT get anything from your earlier year's accumulation of this amount. So, make sure you serve a company for at least 5 years to enjoy your Gratuity.
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Q2 Calculation of gratuity. In case of employee disputes what are the remedial measures from government. what are the remedial measures form government, Make relevant decision. ANS Gratuity act 1972 Gratuity is one of the least understood components of salary. Investment Yogi explains everything about Gratuity and the tax implications for you. Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement. Formula Used : Gratuity Calculation In India = [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26 Where, D.A = Dearness Allowance. Eligibility As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer. 7
How does it work? An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme. Tax treatment of gratuity The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail. For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories – (a) Government employees and (b) Non-government employees covered under the Payment of Gratuity Act, 1972 (c) Non-government employees not covered under the Payment of Gratuity Act, 1972 In case of government employees – they are fully exempt from receipt of gratuity. In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) 15 days’ salary for each completed year of service or part thereof Note: •
Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). 8
•
•
‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored. Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below: (i) Actual gratuity received; (ii) Rs 350,000; (iii) Half-month’s average salary for each completed year of service (no part thereof) Note: • •
•
Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover). Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored. Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10
Illustration Let’s understand the above math clearly with an example: Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.
Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972. 9
• •
Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2
Important points to remember • • •
•
•
Generally, only government employers give DA to their employees. Above example is only for illustrative purpose. The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors. In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 350,000. Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 350,000 will be reduced by the amount of deduction already claimed in the previous years. In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season. 10
Government Measures An employee should have minimum service of 5 years to earn gratuity while for pension he has to put in a minimum service of 10years. If he resigns for reasons other than to take up another employment in Government, he forfeits his right for gratuity. The maximum gratuity payable is 16 ½ months emoluments for the maximum of 33 years of service and for lesser service it is proportionately paid as per Pension Rule.45.
5.3 If a Government employee dies while in service his family is entitled to the gratuity as follows:Qualifying service 1. Less than one year the time of death
Rate 2 times the emoluments drawn at
2. One year and above the but less than 5 years
6 times the emoluments drawn at time of death
3. Five years and above the but less than 20 years
12 times the emoluments drawn at time of death.
4. 20 years and above completed
½ months emoluments for each
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six monthly period subject to a maximum of 33 monthly periods. Subject to a ceiling of Rs.1,00,000 from 14.12.1987, Rs.2,50,000 from 01.04.1995 and Rs.3,50,000 from 01.01.1996 Rule 45.(1b) G.O.448 Fin 07.07.1995, 124 Fin 21.02.1995, 138 Fin 25.03.1997, 174 Fin 21.04.1998. 5.4 In the case of retirement of a Government employee after 01.10.1979 and after completing 5 years of qualifying service, the amount of retirement gratuity shall be ¼ of his emoluments for each completed six monthly period of qualifying service subject to a maximum of 16 ½ times the emoluments subject to maximum of Rs.30,000 upto 31.05.1982, Rs.36,000 upto 30.09.1984 and 50,000 upto 14.12.1987 and 1,00,000 upto 31.03.1985 and Rs.2,50,000 upto 31.12.1995 and Rs.3,50,000 from 01.01.1996 Rule 45(1c) G.O.682 Fin 21.10.1982, 1004 Fin 13.08.1985, 124 Fin 21.02.1995, 138 Fin 25.03.1997, 174 Fin 21.04.1998. In the case of a Government servant who retires on or after 01.04.2003, 50% of the Death-cum-Retirement Gratuity is paid in cash and the balance of 50% in Small Savings Certificate. (G.O 75 Fin Dated 19.03.2003). Subsequently, the Government have directed that the payments of Death-cum-Retirement Gratuity to the State Government employees at the time of retirement shall continue to be made in cash in full even after 01.04.2003. (G.O 218 Fin Dated 27.06.2003). Emoluments include pay, Special pay, Personal pay and Dearness Allowance on date of retirement. 5.5 If a Government employee dies within 5 years from the date of retirement from service and become eligible for service gratuity or pension and received gratuity, or pension or commuted pension and such 12
amount received is less than the amount equal to 12 times of his emoluments his family shall be eligible for a residuary gratuity equal to the deficiency. Rule 45(2).
5.6
Nomination
The Government employee has to make a nomination conferring on one or more persons the right to receive the gratuity in accordance with the order of priority on the members of family. The family for purpose of gratuity will be in the order of : 1.
Wife, Wives, judicially separated wife or wives
2.
Husband, judicially separated husband
3.
Sons, step sons, Adopted sons
4. Unmarried Adopted daughters
Daughters,
Step
daughters,
5. Widowed daughters, Step daughters, Adopted daughters 6.
Father, Adoptive parents
7.
Mother, Step mother, Adoptive parents
8.
Brothers, below age of 18 years, step brothers
9. sisters
Unmarried sisters, widowed sisters, step
10.
Married daughters
11.
Children of predeceased son ( Rule 45(5) ).
If the deceased employee was a Divorcee without an issue, the gratuity shall be payable to other members 13
of the family but no family pension will be paid. Letter 135030/86-2 17.11.1987 Only the nominee as per nomination is entitled to receive the gratuity and the person included in the succession certificate is not eligible unless there is a court decree or order with the Government impleaded in the suit. Non members of family mentioned in the succession certificate is not entitled to receive the gratuity. Letter 135030/86-2 Fin 17.11.1987 If there is no nomination, then the order of priority for payment of the gratuity will be (a) items 1 to 4 of Rule 45(5) in equal shares ; (b) If items 1 to 4 are not alive then items 5 to 11 in equal shares. 5.7 If the nominee is a minor, then the gratuity shall be paid to the guardian of the minor on production of guardianship certificate. Rule 46(4). 5.8 If any surviving member of the Government employee’s family who is eligible to receive the gratuity due to the deceased employee has not been heard of by those who would have heard of him/her the share due to such person shall be paid to the surviving parent if such a persons is a minor for being paid as and when he/she is traced. If the person is a major the share shall be paid to items 1 to 4 mentioned in para 6.6 for being paid to him or her as and when the person is traced. If such a person has not been heard of for a period of 7 years, the person shall be deemed to be dead and the family members under items 1 to 4 mentioned in para 6.6. have to share it equally. Rule 46(e). 5.9 If a member of family of the deceased Employee who is eligible to receive the gratuity by virtue of Rule 46, is charged with the murder of the employee or abetting of such crime, his claim remains suspended till the conclusion of the criminal case. If he is convicted of the offence, his claim is barred and the amount will be paid to the other eligible members. If he is acquitted of
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the charge his share will be paid to him Pension Rule 46(A).
5.10 Lapse of Gratuity Where a Government employee dies while in service or after retirement without receiving the gratuity amount and if has no family or has not made nomination or there is no subsisting nomination, the gratuity due will be lapsed to Government. Rule 47.
5.11 Anticipatory Gratuity If a Government employee has to retire before the gratuity could be finalised, the Accountant General can determine the gratuity to which the employee is entitled and authorise anticipatory gratuity restricted to 80% of such determined amount and in case there is an excess payment found while finalising,, the pensioner has to refund the excess.( Rule 59 ).
5.12 Provisional Gratuity If any departmental or judicial proceedings are pending against the employee and he is permitted to retire pending such proceeding, gratuity shall not be paid to him until such proceedings are finalised and order issued. ( Rule 60(1c) ) However if there is any possibility of administrative delay in finalising the proposals, and forwarding them to the Accountant General, the Head of the Department or Head of office has to sanction Provisional Gratuity at 100% of admissible amount to Nongazetted Officials and 80% to Gazetted Officials after deducting the dues. G.O. 467 Fin 25.05.1977. 15
5.13 Gratuity shall not be withheld in respect of a Government employee, who has been permitted to retire pending departmental / judicial proceedings against him, where such proceedings are only for administrative lapses not involving any pecuniary loss to Government (G.O.286 Fin 07.04.1995 Rule 60(1c) and 69(1b). 5.14 Interest for Belated Payment of Gratuity As per G.O. 1475 Fin 23.11.1973, an interest @ 8% per annum has to be paid to retired person if the gratuity amount remained unpaid for more than 2 months from the date of retirement if the individual was not at fault or disciplinary proceedings are not pending against him. In G.O. 517 Fin 12.06.1987 and 527 Fin 15.06.1987 and 818 Fin 01.12.1988 the interest rate was modified as delay beyond 3 months but upto one year @ 7% per annum and delay beyond one year @ 10 % per annum. In G.O. 122 Fin 20.02.1995 the interest rate was ordered @ 12% compounded annually. The delay in administrative office, A.G.s. Office are covered for payment of interest when the delay could not be attributed to the individual. A.G.s authorisation is not necessary for payment of interest. Head of Office has to claim and pay the interest to the individual after getting orders of Government. In case of arrears of gratuity arising on revision of emoluments interest has to be paid for delays beyond 3 months. In case of compulsory retirement, voluntary retirement, death of employee interest shall be paid for delays beyond six months. Letter 103354 / 87 – 2 Fin 07.09.1987. In respect of cases instituted, Gratuity is withheld till conclusion of disciplinary proceedings -
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a) If a Government servant is exonerated of all the charges and where gratuity is paid on conclusion of such proceedings and payment is made beyond three months from the date of retirement, interest shall be allowed; b) In cases where the Government servant is not fully exonerated on conclusion of disciplinary proceedings and if the payment is delayed, in such cases interest shall be allowed for the period of delay beyond three months from the date of issue of orders by competent authority following payment of gratuity. (Lr. 31397/Pension/91 Fin 10.05.1991.)
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