Can an Employee Claim Gratuity Based on CTC Before Completing 5 Years?

Hi,

One of our employees worked for 4 years and 5 months with our organization. We have explained to him that Gratuity is payable to any employee after completion of five years of service. He is claiming Gratuity based on the Gratuity amount mentioned in his CTC.

Could you please guide me on whether he can claim Gratuity based on the amount mentioned in his CTC?

With Regards,
Rakesh Dubey

Dear J.S. Malik,

He is not entitled to gratuity as he has not completed 5 years of service.

Thank you.

Best regards

Gratuity is a cost to the company only when an employee completes 5 years of the term. Including the same in CTC is advisable only for those companies that have created a separate "Gratuity Trust" and are transferring the annual contribution to this "Gratuity Trust's" account. Only in this case can they justify the reason for including the same in CTC.

A company mentioning gratuity in CTC and not having a separate "Gratuity Trust" is a risky proposition. You are still legally immune because completion of 5 years (or at least 4 years and 240 days) is a must for the payment of gratuity, but I am aware of a few cases pending in courts on the same subject, stating this addition of gratuity in CTC as a "representation of misleading facts."

Conclusion

Continue this practice only if your company has a separate "gratuity trust"; if not, create one now.

Gaurav

I am working in a private limited company for 4 years, 9 months, and 25 days. Am I eligible for gratuity as per the act, or not eligible? Please advise me. If eligible, kindly provide proof of the act.

Dear,

As you have not completed 5 years of service, you are not entitled to gratuity. Please see the applicability clause of the Gratuity Act.

Regards,
J. S. Malik

Dear Rakesh,

It is illegal practice to hide the fact of mentioning gratuity in CTC. You have done this incorrectly. From the employee's side, the employee is not eligible for any gratuity as he has not completed his five years of service.

Regards,
Pankaj Chandan

Dear Malik Sir,

I heard from someone who is working in a senior position in the HR department. According to him, if a person like X has worked for 4 years and 6 months, it is rounded off to 5 years for gratuity calculation purposes. Could you please clarify this?

Additionally, please explain the following statement.

Thanks in advance.

Best Regards,

P.C. Gupta

Payment of Gratuity Act, 1972

Section 4A: Compulsory Insurance

(1) With effect from a date notified by the appropriate Government, every employer, except those under the Central Government or a State Government, must obtain insurance for gratuity liability from the Life Insurance Corporation of India or a prescribed insurer. Different dates may be appointed for various establishments.

(2) The appropriate Government may exempt employers with an approved gratuity fund from the insurance requirement, subject to conditions. Employers must register their establishments with the controlling authority within the prescribed time.

(3) Rules may be made by the appropriate Government to implement this section, including the composition of the Board of Trustees of the gratuity fund and recovery of gratuity amounts from insurers or the fund.

(4) Failure to make payments towards insurance or the approved gratuity fund will result in the employer being liable to pay the gratuity due, along with any interest, to the controlling authority.

(5) Non-compliance with payment obligations may lead to fines, with a continuing offence incurring additional daily fines.

Explanation: In this section, "approved gratuity fund" has the same meaning as in the Income-tax Act, 1961.

Dear P C,

You have raised two points.

1. If someone has completed 4 years and 6 months, then he should be entitled to get gratuity as 6 months are converted to one year. It is absolutely wrong; 6 months cannot be converted to one year in the case of applicability. However, for the calculation of gratuity, 6 months or more are counted as a year. In one case, the Madras High Court has given a judgment that if an individual has completed 240 days in the fifth year, then he should be entitled to gratuity. But by this judgment, there is no amendment in the gratuity act, and the applicability clause still states five years.

2. This Section 4A is not yet notified. After notification by the appropriate authority, it will be included in the act, and only then will gratuity be through insurance.

Regards, J S Malik

I fully agree with the view expressed by senior member Mr. Malik. For qualifying for gratuity payment, five years of continuous service is a must, and there is no provision to round off 6 months or more to treat it as one year.

An employee is eligible for gratuity only after completing continuous service of 5 years. Mentioning it in the CTC is for the purpose of arriving at the cost per employee. Legally, gratuity is payable only after completing a continuous five years of service.