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Gratuity

Priya Agarwal (Aticled Assistant) (319 Points)

05 March 2014

Hi,

My query is regarding Gratuity Act.

As studied in The Gratuity Act, it is mentioned that a company covered under the act is required to maintain Gratuity Fund with LIC ?

1. So first thing is - Is it Mandatory ? and if not, then how the amount of gratuity deducted (a part of CTC) is managed by the company.

2. The condition given in act is - A Company is liable to pay Gratuity to an Employee if that particular Employee completes "5 Years of Continous Service with a Particular Employer". So if an Employee leaves a company before 5 Years and since the company is showing the salary as a part of CTC what will be done with the Amount deposited with LIC. Will it be Refunded back ?

The Query as discussed above was noticed while doing the Internal Audit of a concern.

Thanks & Regards

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20 Replies

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 05 March 2014

Hello Pirya Ji

As per Employee Concern

The Payment of Gratuity Act 1972:- Gratuity is a voluntary Payment made by the employer to the employee in recognition of continuous, meritorious services and sincere efforts by the employee towards the organization.It is governed under the Payment of Gratuity Act 1972.

It is an Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, Oilfields, plantations, ports, railway companies, and shops or other establishments.

Since the Act doesn't direct for mandatpry applicability. Hence its upto the company they want to be applied in the company or not ? If compnay decides that the same will be applied then it shall be form part of CTC to the employees have completed 5 year of service. Hence if the the same included in CTC the employees who have not completed 5 year then its wrong and not as per PGA 1972. So correspondengly u can report in ur audit report.

However if an employees leave the organisation before 5 year then he cannot claim the same.

As per Company is concern: -

If a employees is employed by the company the company is reuired to recognised the all costs associated to that employee whether it is current or payble in future, similarly the Gratuity cost is also a cost payble by the company to the employees who have complted the services of 5 year. Hence company assumes that the employees employed shall be continued for 5 year and correspondingly account for liability of Gratuity.

Consequence of the employess when he leave the organisatio before 5 year.

Read at this link also

/experts/gratuity-is-a-part-of-ctc-or-not-88426.asp#.UxdQ6PmSySQ

Hope u got clarified.

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Priya Agarwal (Aticled Assistant) (319 Points)
Replied 05 March 2014

Thanku sir my 1st query is almost sorted. This is a sort of illegitimate activity.As the concern I am talking about is a tele callers kind of like BPO . So the employees turnover ratio is very high and they sholuld not show gratuity as a part of CTC. And my query related to the deposition of this amount with LIC and in case the employee leaves then the treatment of the same is still pending.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 05 March 2014

I think they have to show bcz its ultimately a liability for the company. Its is controversial thing..oky ..let me find if i got i will notify u.

Priya Agarwal (Aticled Assistant) (319 Points)
Replied 06 March 2014

Okay sir. Waiting for the reply.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 06 March 2014

Dear as i tried to find out the all these queries but answers is till not so much clear... Conclusion i reached that

1. It is a cost hence they are accouting the same from the date of joining of Employees.

2. Second thing is If the same is part of CTC the eomployees is required to bargain the same at the time of joining.

3. And for the quary regarding What abou the amount deposited with the LIC as gratuty - it shall be either adjusted with the next mapyment of premium by the company or refund by the LIC on leaving of employee its depend on the terms and condition with the LIC.

The concepts of CTC has not been defined under any law its recent concepts of Cots to the company.

Another view can be withdrawan is that company is not deducting any amount from employees salary infact they are doing what they have said at the time of negotiation of salary.

If we see our joining CTC we find that company is giving details of Deduction oor Additions which will be made in Gross salary.

Hence we have to go with company prinicple's we cannot fight except that we may bargain.

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Priya Agarwal (Aticled Assistant) (319 Points)
Replied 06 March 2014

Okay My Almost doubts are clear. But sir still some doubts are left like is the amount deducted, is mandatory to be deposited with Lic and if not then what is done with that amount I.e.. how is it managed ? And since Gratuity is shown as a part of CTC we need not mention the same in the audit report. Hope I have understood right. Thanks

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 06 March 2014

in the both situation u can report 1. if it is mandate by the act even thogh they required to deposit in time if not depositing in time ..u can report. 2. if not required by the act then still u can report by saying that comp. should deposit within time to protect himslf from any continget liab. or risk of money loss.

(Guest)

Its not compulsory to deposit the same with lic or elsewhere... A company need not to create provision for gratuity .. though it is a part of CTC.. because no where in any act the word CTC is important.. Every Act talks about salary not ctc..

a company generally pays gratuity as the employees leave after 5 years and the whole grauity amount is expenses in the same year

Priya Agarwal (Aticled Assistant) (319 Points)
Replied 06 March 2014

Sir I too agree with the same. But as per AS 15 a company is required to make the provision of gratuity and while calculatimg the same amount why the enployees who have not completed 5 years of service are included.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 06 March 2014

<5 year services employess are included just because that PGA 1972 define that when it shall become payable the company to employees ..its not mean that the company is required to pay gratuity only on gratuity amount deducted on the above of service of 5 year.

But the fact is when it become payable the company is required to pay entire amount which from the date of joining of employee this main reason by which they are making part of CTC hence they included all thsese employee whether the are below 5 year or above.

Since the payable amount are not fixed they are high risk associated with that and same time copany is also required to generate the interest on investment hence they prefer to take insurance of those payments with LIC..

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(Guest)

as- 15 does not tell us that we had to make any provision for those also who had not completed 5 years..

and still if the company is doing this it does not effect anything na...

its just creation of liability ...

we hadnt expensed anythinng

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CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 06 March 2014

look AS 15 tells about the employee benefit if compny is taking benefit of employee for which anything is payable in future then it must hve to create liabity or hve to mke provision according to as-29 so...copany is not expnsed anything but taken benefit from employees today for which liabilty is continuously accumulated during the service of employees.

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