Training Operations - Csr
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Bk Mohanty
Sr. Hr Executive @ Polymerupdate
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Hello sir, Can any 1 tell me that graduity is part of CTC or not and if it is deducted from salary than it should be given to employee back or not if they left service before 5 years. Regards, Vinay
From India, Vadodara
Hi, Its not deducting from employee salary, it is a obligation that has to pay by the employer to employees those who are completed 5 years.
From India, Hyderabad
Hi Vinay...

Let's first understand gratuity:


gratuity (plural gratuities)

A reward, service, or payment provided freely, without obligation.

(common usage) An additional charge placed for services rendered; see also: service fee.

Source: gratuity - Wiktionary

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.

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.

I'll illustrate with an example:

Suppose you are going to a restaurant for dinner. Having looked at menu, you have had an estimation of the bill that is coming. Accordingly you also know what kind of tip would you leave for the waiter. (Usually we leave a 10-15% tip as a reward for the service given so just an estimate)

Now the tip that you are giving is like a gratuity... You keep aside that money or you make a fund of it so that you know at the end you're to give it to him. You are also aware that if bill rises, you may have to shell out some more and it would also depend on the time that the service is rendered. (One can't pay equal tip to a waiter who has been serving you well for say 5 hours as much as you'd pay to one who was with you for say a couple of hours, right)

Now - though the bill was X and you paid Y as tip, the total cost for food, the total expense you incured on food was X+Y, right.

So understand that CTC is cost to company and they have a right to put up all the cost in your ctc that they spend for you or give you (either in cash or kind or whatever means)

Deduction is different. Deduction means it is a part of salary but has legal deduction implications. Deductions would include your PF, Professional tax, TDS, deductions against advance salary / loan availed, etc.

I hope you're clear on the fact that Gratuity & Deductions are different.

Now coming to your point - Payment of Gratuity even if we leave before 5 years of service.

See this again with the same hotel example.

Paying of tip is not obligatory. In simple words, it is not a golden rule to pay a tip to a waiter, as it is his duty to serve us and is paid for it by his employer. But we pay a tip for the good service they provide us, out of good will.

So gratuity is not an obligation on employer's part. It is just like a reward. You can't force someone to give you a reward, right...

Another thing... say for eg. the waiter was not with you all the time, he didn't give you welcoming experience, the service was not to the mark, lot of wait time and food not that great, service and etiquette not that great, you don't put a tip.

In a similar fashion how can we expect our employers to pay us a gratuity when we are not providing them continuous service.

More so, even the law or the gratuity Act says - we become eligible only after 5 years of service. However if somone is resigning after a min of 4.8 years of service is eligible to claim gratuity. Again if an employee meets accident and is fully incapable of performing task or meets death while in employment even before 5 years, the employer pays him/her gratuity for the served period in those exceptional cases even before 5 years.

(Pls note that I didn't mean to compare you with a waiter, it was only the best and simplest example i could think of to explain this thing. Pls don't take it personally)

Also read foll for better understanding

1. What is Gratuity - Understanding Taxes

2. All you want to know about gratuity

3. Clarity between gratuity eligibility service (5 or 4.8 yrs)? - Labour & Service Law Forum - Law, Lawyers, Advocates, Law Firms,Legal Help, Legal Experts,Judgements,Law Help, Indian Lawyers

For any further clarifications, pls feel free to post :)

Wish you luck. Hope it helped. :)

From India, Mumbai
Dear Vinay,
Gratuity is a liability on the employer to be paid to the employee if he renders 5 years of service in the organisation. Hence, employers calculate Gratuity and include it as part of CTC and show it as part of pay package. The calculation is done as follows
Basic Salary X 15/ 26 gives you the gratuity payable per annum and this is divided by 12 months and included as CTC/ Month.
Some companies also have agreement with LIC of India under the Group Gratuity Scheme. The employer here contributes towards the Gratuity fund and LIC pays Gratuity based on a claim from the employer.
Hence, it shown part of CTC, it is neither paid monthly to the employee nor deducted from his salary.
It depends on how generous is your employer to pay Gratuity even if employees leave the organisation without qualifying the eligibility criteria of 5 Years. Generally employers pay Gratuity only if the employee qualifies (death being an exception)

From India, Madras
Thank you very much,
In our case, employer is deduction Gratuity 4.81% from basic.
And if they left after 2 years than they must be paid there deducted gratuity or not.
In another case.
If they are paid as per rule after 5 years than the deducted gratuity of 5 years may loss.

From India, Vadodara
Generally in the CTC fixation, Gratuity component is included. But any body separating before rendering continuous service of 5 years is deprived of this payment which is permissible both legally and otherwise also. Pl remember that though it is a part of CTC, no such dues are recovered from the wage period salary.
But there are good companies who pay back proportionately at the time of making full and final settlemen,t reason being it was a commitment made by them while fixing/ negotiating CTC before joining.
bk mohanty
Advisor and Sr Consultant

From India, Bhubaneswar
Dear Vinay,

First of all, let us understand like this. You are hired by the employer for some purpose. He has to spend so many things on you besides paying the monthly salary, and those expenditures are to be accounted for, anywhere in the budget. And the word CTC was coined just to accommodate the expenses incurred for you during the period of employment.

Generally, when a person joins a company- both the party would like to continue the contract for longer period of time for their mutual benefits. And with the enforcement of more labour legislations, the employer is made responsible to pay compensation to employee for completing certain period of time (employment) with the employer.

Since those future expenses are the employer's liability, he has to forecast and accommodate those expenses on a regular basis, so that he would not default in making the final settlement of the leaving employee. Hence, please do not get into confusion between the salary and CTC. Please remember that the Gratuity, Bonus/Ex-gratia, Retiral Benefits and employer's contribution of PF are not deducted from the salary of an employee but are only the part of his CTC.

Now, let us come to your question on leaving the job before five years and the applicability of gratuity payment thereafter. Since the gratuity is not deducted from your salary, the employer is not liable to pay you the same, if you are not fulfilling the minimum eligibility criteria for getting the gratuity as per the existing gratuity act. The budget only remains a plan and not executed due to the fact that the contract is breached by one party and hence you cannot claim the gratuity.

Hope this would clear your doubts.


P. Vathiraj

+91 958 533 3344

From India
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