Understanding Gratuity in CTC: How to Calculate It for Employees Leaving Early

Anyone can provide me with a salary structure where Gratuity is part of the CTC. How do we calculate the Gratuity amount during the Full & Final Settlement of an employee if he/she is leaving the company before completing five years in the same context.

Hi Govind,

It is okay. But my main question is, when we are discussing if gratuity is part of CTC and an employee leaves the organization before five years, I have some doubts:

- Will the company not pay the gratuity due to the non-completion of five years?
- Why is the employee not receiving the gratuity amount, even though they are eligible for it as per the CTC?

Please review and let me know if you need further assistance.

As gratuity is part of CTC, then it should have been mentioned in the offer letter/appointment letter that Gratuity is paid as per the Payment of Gratuity Act. According to the said act, gratuity is to be paid only upon completion of 5 years of service with the employer.

However, it is the sole discretion of the company whether to pay gratuity before the completion of 5 years. The company is not bound if an employee resigns before completing 5 years.

If further clarification is required, please revert back.

Dinesh Bhansali
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Hi,

Gratuity could be used more as a retention strategy. Though it is for old-age security and one of the government acts to provide financial security, nowadays it is losing its importance fast as people resign before completing 5 years. Therefore, you may consider including in the appointment letter, "Gratuity will be payable as per the act."

However, only if someone completes 4 years should you start reminding them that they will be eligible for gratuity if they complete at least 4.5 years - as one of the retention strategies for the company. In one of my previous companies, which was a start-up, we only bothered to open a gratuity fund with some minimum amount when the first employee completed 4 years.

Thanks,
Geeta

Hi,

Could someone provide more details about "Opening a gratuity fund" as shared by Geeta? I would like to know: what is this? What is the purpose? How can we open it, and what are the other legal compliances involved?

Thank you.

Dear Mahaneder,

As per my understanding, it is not advisable to mention Gratuity as a part of CTC. If you are mentioning Gratuity in CTC, then you need to pay it to the employee, even if he leaves before the completion of 5 years of continuous service. Hence, it is advisable to just mention Gratuity as per the Payment of Gratuity Act in the appointment letter.

Reason: Just by writing Gratuity doesn't mean that it is the Gratuity as per the Act. Anything written in the appointment letter is considered a part of the agreement between the employee and the employer. If the employer is paying Gratuity as mentioned in CTC detail, the employee can claim that he is also eligible for Gratuity as per the Act.

Regards,
Prashant

If gratuity is part of CTC, then the company should give the gratuity amount at the time of full and final settlement. How does it come to 4.81% of basic per month?

For example:

Basic Salary: 10000/- p.m
Gratuity is calculated as 15 days of basic pay for every completed year of service. This amount should be divided by 26 to calculate the daily salary: 10000 / 26 = 384.6. Gratuity is calculated based on 26 days and then multiplied by 15 days, which equals 384.6 * 15 days = 5769/-. This total would then be divided by 12 (as there are 12 months in a year): 5769 / 12 = 480.75. This amount is equivalent to 4.81% of 10000/- per month.

I hope this calculation is clear to you. If not, please call me at 09891151873.

Vivek

Well, Dinesh, I don't agree with the second paragraph because to pay or not to pay gratuity cannot depend solely on the company. This is a statutory component, and every rule and provision present under the Payment of Gratuity Act needs to be adhered to. Even if the company wants to pay it before 5 years, they cannot do so for the simple reason that they would be going against the rules.

IF Gratuity is part of CTC, then the company should give the gratuity amount at the time of full and final settlement. How does it come to 4.81% of basic per month?

For example:
Basic Salary: 10000/- p.m
Gratuity is 15 days of basic for every completed year of service. The amount should be divided by 26 to calculate the per day salary. 10000 / 26 = 384.6. Gratuity is calculated on 26 days multiplied by 15 days, which means 384.6 * 15 days = 5769/-. This amount would be further divided by 12 (as there are 12 months in a year), which means 5769 / 12 = 480.75. This is equal to 4.81% of 10000/- p.m.

You have provided an example, but could you please show me the real gratuity given as per the above formula?

Hi,

Lots of confusion, follow these 3 cases:

Case 1 - If you mention "Gratuity will be paid as per the gratuity act" then you must follow as per the act; it is not the company's decision to pay or not to pay gratuity after an employee has put in 5 years of service. (If it is mentioned in the appointment letter to be paid as per the act, it implies the company is not willing to pay before 5 years and the company is not liable to pay gratuity before completion of 5 years).

Case 2 - If you are not mentioning it will be paid as per the gratuity act but showing gratuity as a part of CTC, then it's the company's decision to give it even before completion of 5 years. (Can be paid with F & F settlement as per the formula given by Vivek).

Case 3 - However, it is mandatory, whether it is mentioned in the appointment letter or not, if an employee has completed 5 years of service, he must be paid gratuity as per the rule of the land (India).

Hi,

I am leaving my current organization after 5 years and 2 months. Even after that, they are telling me that I am not applicable for gratuity. They informed me that it depends upon the package when you start.

My starting salary was around 8000, and each year it increased during the hike time. Could you please tell me how to resolve this confusion, or if they are correct?

Please help me out.

You all have given your views regarding this. My question is, do we have any seal from the High Court or Supreme Court on whether to pay the Gratuity amount if it is a part of CTC? I think not yet. If we are not following the law, then why are we going through the Payment of Gratuity Act, 1972? Are there any provisions in Indian Labour laws for Pvt. Ltd companies or firms?

Company Discretion on Gratuity Payment

No, then there is no meaning actually. Keeping you in the organization and firing you from the organization is completely the company's discretion. It is the same as giving you the gratuity or not; it would be the company's decision, not yours, mine, or the government’s. Pvt companies and firms are private. The owner is the only law and order; there are no Indian Labour Laws and government regulations.

I finished 4 years, 5 months, and 10 days in my last job. Gratuity was mentioned in my ANNUAL SALARY. As per my understanding, I am eligible to receive anything mentioned in my salary. Am I eligible? Can leaves be counted towards service duration?