Cost-to-Company (CTC) and Statutory Compliance
(Volume – 35 of Coffee Break Compliance Guide from Anandan Subramaniam)
CTC – a term which has replaced wages/salary. Is it statutorily right?
Wages or Salary is a periodic payment received by a person engaged to perform specific job in an organization.
As per section 3 of Payment of Wages Act, 1936, every employer shall be responsible for the payment of all wages reported to be paid under this Act to persons employed by him and in case of persons employed in Factories, Industrial or other establishments, etc.
While engaging a new resource or while fixing new compensation upon increment or promotion for an existing employee, the establishment need to compute the cost involved in engagement of such resource and the term used to denote the monetary spend by the establishment is called as CTC.
Different terms and appropriate definition
• Cost-to-Company is total money to be spend on engagement of such resource, during a year.
• Gross is the amount an employee receives as a salary before any deductions.
• Net or Take home salary is the amount an employee receives after all applicable deductions.
CTC is never equal to the amount of take-home salary of the employee. There are many components in the CTC, where one does not receive all as part of take-home salary.
CTC will be having the following components – which may be monetary or non-monetary.
• Monetary : Gross salary + Employer contribution of ESI + Employer contribution of PF + Bonus + Gratuity + LTA
• Non-monetary : House accommodation + Car + Driver + Servant + Club membership, etc
Gross salary will have the following components
• Basic salary + HRA & other Allowances + Reimbursements
Net or Take home salary
• Gross salary – Income Tax – Employer’s PF contribution – Employee’s ESI contribution – Professional Tax
Whether the employer contribution towards –Variable Bonus, Statutory Bonus, Gratuity, PF and ESI, can be included in the CTC Structure/Head?
1. Variable bonus can be included as one of the Head in the CTC to form part of a compensation.
2. Statutory bonus may not be included in the CTC, as it is on the Profit earned by the Establishment during the Financial Year and available surplus to compute the percentage to be disbursed. Few establishments are having 8.33% of Basic+DA as a component in CTC but if the available surplus is more than such percentage to be disbursed as Statutory Bonus, it will be challenging to book.
3. Gratuity is paid only in case of permanent disablement or death or separation after 5 years (or 4.240 years in some States of India). In such case including Gratuity as part of CTC structure is infructuous. Where such money is paid to a Gratuity Trust formed by the employer, it can be included in the CTC.
4. With reference to PF, it is allowed by the EPFO to have “employer contribution” in the CTC and it will not have an impact if the “wage ceiling” is considered for paying the PF contribution. This was stated in a Circular from EPFO vide no.C-III/022/3(6)2014/MH dated 18 March, 2014. Following are the excerpts of the circular notifying that Contribution under Section 6 not payable on Cost to Company (CTC).
For PF, the Basic wages defined under section 2(b) of the Act means “all emoluments which are earned by an employee while on duty or on leave”. Emoluments means all earnings by an employee for work done by him in an establishment and includes bonus, commission etc.
Section 6 deals with Contribution says that the contribution which shall be paid by the employer to the fund shall be “a certain percentage of the basic wages, DA and retaining allowance”.
Paragraph 31 of the Employees’ Provident Funds Scheme, 1952 states that “Notwithstanding any contract to the contrary the employer shall not be entitled to deduct the employer’s contribution from the wage of a member or otherwise to recover it from him”.
Many of the employer in today’s world give the breakup of outgoings under different heads as CTC in the appointment letter issued to a new employee. Emoluments means all earning by an employee for the work done by him in an establishment and includes Bonus, Commission, etc, whereas Basic Wages (as defined in the Act) expressly excludes these items / components. CTC cannot be therefore construed to mean ‘emoluments which are earned by an employee within the meaning of the term ‘basic wages’ as given under section 2 (b) of the Act and contribution under section 6 of the Act cannot be thus charged on CTC.
In view of the above, the employer’s share of PF contribution booked as a part of CTC in respect of his employees by the employer does not tantamount to mean that the employer is deducting employer’s contribution from the salary of the employees. Accordingly all components of Cost to Company cannot be treated as emoluments under Section 2(b) of the EPF & MP Act.
5. ESIC : As per ESIC Act, the ESI corporation was empowered to initiate prosecution against employers under section 84 & 85 if the employer deducts or attempts to deduct from the wages of an employee, the whole or any part of the employer’s contribution.
Similar to EPFO, there is no such clairty by ESIC corportion on showing the employer contribution in CTC, hence establishments needs to take due care on this.