Is It Fair to Include Gratuity in CTC Before 5 Years? Let's Discuss the Ethics

Ethical Considerations of Including Gratuity in CTC

Is it ethical for an employer to include gratuity in the CTC? As far as I know, gratuity is only applicable after completing 5 years in the organization and can only be paid then. So, is it right to have it accounted for in the CTC of the employee from the first year onwards?

---

I have corrected the spelling and grammar errors in the text and ensured proper paragraph formatting. The original meaning and tone of the message have been preserved.

It depends on the company. If they have an affiliation with any insurance company for gratuity purposes, some companies may indicate this in the CTC. However, it should not generally be shown in the CTC.

It is unethical, but many companies resort to this practice. The employees who leave the company before completing 5 years are the losers. It is one of the tricks for retaining employees.

What if the employee leaves before 5 years and demands the gratuity amount to be paid to him/her under some other head, since it is a part of his/her CTC which was offered during the time of appointment? My question is, will the company be liable to pay the amount deducted towards gratuity every month if an employee leaves the organization before 5 years, even though not under gratuity but some other head?

Yes, it is logical. The only thing is that if an employee leaves the job before completing 5 years, they should receive that amount back during their full and final settlement. Otherwise, it is unjust to that employee.

Dear Kamran, I am sorry to disagree with you as well as with all my other friends who appear to have agreed that it is unethical, etc., to show gratuity as part of CTC. If a potential candidate is shown only a lump-sum figure as the amount promised to him, I agree with you that it would be unethical not to pay the amount either on a monthly basis or at the time of leaving (even if the employee leaves before the period of 5 years).

However, if a full break-up is shown to the employee, and the rules for payment of gratuity are disclosed, there is nothing unethical about not paying the amount to an employee who quits before the qualifying period of 5 years. The law clearly stipulates the conditions under which Gratuity is payable to an employee. If the amount is not taken into account while computing the CTC, it would mean a sudden, unintended jump in the CTC of the employee after he/she completes 5 years. Kindly remember that after completing the requisite period of 5 years, gratuity is payable for the past period, from day 1.

Gratuity, by its very nature, is meant to reward service, provided it is given for a minimum period of time. This serves as a retention tool, albeit a rather weak one, and there is nothing unethical about it. Today, there are many incentive schemes, (including stock option schemes) that, once earned, are paid out in stages, provided the employee continues to remain in service for a defined period of time.

I maintain that as long as all conditions for payment of a certain amount are disclosed to an employee at the initial stage, and the rules are not changed midway, there is nothing unethical in the said practice.

Regards, Gerry303

I agree with Mr. Gerry 303 that it is a fact of the Gratuity Act. The employer is required to have provisions and pay into the fund every year; they cannot keep it with them (the fund created with LIC).

I personally would not include gratuity while calculating the CTC since this (gratuity) is payable only after he/she completes 5 years of continuous employment with the company. This may or may not happen. However, sometimes candidates do tend to include gratuity in their current CTC to inflate their current CTC in order to secure a better remuneration package. In such cases, it would be appropriate to include gratuity as part of the CTC offered to the selected candidate. It is a matter of comparing apples to apples.

Regards,
Vasant Nair

Dear friends, HR always talks and worries about attrition, but when discussing long service, we tend to take a step back. Monthly remuneration is only eligible after completing 26 days of work, and one cannot expect a full salary while working only part-time in a month. Similarly, one qualifies for gratuity after completing the stipulated period of service as per the act. Furthermore, CTC is the cost to the company, and the company has to calculate the monthly liability to an employee, regardless of whether they will continue for one year or ten years.

It is up to the candidate to calculate the net earnings per month during the interview and negotiate with the employer if the offered amount is not sufficient for their services. Therefore, this is not just a matter of ethics but also a matter of one's ability to negotiate with the employer and demand a better salary.

Though my opinion may differ, let us debate and seek more clarity.

Regards,
PT Ramesan

Dear Kamran,

History of Gratuity

Gratuity was initially supposed to be a gift from the employer, but now it is no longer considered as such. It is a service benefit rightfully earned by employees and serves as a form of social security for them after their retirement, enabling them to take care of their families in a respectable manner.

I request you all to study the Payment of Gratuity Act, 1972. Understanding this act will help in resolving many queries.

Section 4 of the Act

As per section 4 of the act: "Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years - (a) on his superannuation, or (b) on his retirement or resignation, or (c) on his death or disablement due to accident or disease." Therefore, a continuous service of 5 years is a requirement.

Furthermore, the underlying idea behind the formulation of the act was to provide social security to workers after their retirement. In essence, no gratuity should be payable if you are young, socially secure, and believe in switching jobs frequently! (Just kidding!)

Next time you negotiate your salary, keep the gratuity structure in mind. Even if gratuity is a part of your CTC, it is still your money, which you will receive after completing 5 years of service.

I believe calling gratuity a Retention Amount is a clear violation of the purpose of gratuity as outlined in the act.

Thanks,
Rahul Chhabra

Gerry has explained the concept of gratuity in a clear way. CTC means Cost to the Company, and gratuity payment for an employee is a cost to the employer. Nothing is wrong if the same is included in CTC. As per the Gratuity Act, it becomes payable after completing 5 years of service. The employee himself is responsible for not receiving the gratuity payment if the service is less than the mentioned period.

Regards,
Smita

The proportion of gratuity is 4.81% of the basic + DA salary, which is added to the CTC. Suppose BASIC + DA is 20,000 per month. Gratuity proportion in CTC = 11,520 per annum (BASIC + DA * 4.81% * 12). Please correct me if I am wrong.

Nice explanation. However, gratuity has never been a retention tool and will never be. It's an instrument to ensure social security after retirement!

Regards,
Rahul Chhabra

Gratuity is a cost incurred by the employee. Hence, it is perfectly ethical to include gratuity in the CTC sheet. There are many more costs included in CTC, and the actual benefits to the employee against those costs are subject to many conditions and eventualities. For example, the employer incurs the cost of employer contribution to ESI, but the employee will only benefit if they fall sick and choose to avail of benefits from ESIC. The same applies to group insurance premiums.

In the case of gratuity, even though it is payable after 5 years of service, the employer has to incur gratuity costs from day one through group gratuity premium or provision for future gratuity payments. However, not all employees are aware of the terms and conditions applicable to the payment of gratuity. Hence, the employer has to be very transparent and upfront, not hiding such finer points while offering CTC.

The CTC sheet should always provide a breakdown of all the included costs, separately mentioning the components payable monthly, annually, and other benefits. There should be a specific footnote mentioning that gratuity is payable only after the completion of five years of service, at the time of separation only.

I fully agree with the idea of including gratuity in the Cost to Company (CTC) by the companies and not directly paying it to their employees if they leave before completing five years. This practice can be seen as unethical.

It is important to understand that gratuity should be viewed as a token of appreciation from the organization to its employees. It is a way of showing gratitude to those employees who have dedicated their time and skills to contribute to the organization's success.

I was told by my employer upon joining that the gratuity amount would be deposited with government authorities if I leave before completing 5 years, as gratuity is included in the CTC. I will not receive the gratuity that is set aside if I choose to leave before 5 years. This practice is unjust and unethical.

Pon

It depends on the company whether to include it in the CTC or not. However, if the company chooses to include gratuity as part of the CTC, this information should be clearly communicated to the employee when issuing the offer or appointment letter. The employee can then decide whether to accept the terms and conditions or not.

Regards,
Michael Joseph

Hello All, My employer gave me an appointment letter from the 1st company on 01.08.2005. After six months, on 01.02.2006, they transferred me to the 2nd company without providing any appointment letter. Three months later, on 01.04.2006, they transferred me to the 3rd company without issuing any appointment letter. I am currently working in the 3rd Company. In the first company, they paid me in cash, while in the 2nd and 3rd companies, they paid my salary by cheques. All three companies are under family management.

As of now, I have served for more than 5 years. I would like to know if this 5 years of service will be eligible for Gratuity purposes. Please guide me.

Thank you!
PKS

Yes, under the circumstances stated by you, you are entitled to payment of gratuity.

Regards,
Vasant Nair

You are eligible for gratuity as the principal employer is the same!

Regards,
Rahul Chhabra

Having agreed with Gerry 303, I would like to add that gratuity is admissible in less than 5 years also in the case of the death of the employee, which has to be taken into account.

Agree with Mr. Gerry 303; that is the fact of the gratuity act. An employer is required to have provisions and pay to the fund every year. The employer cannot keep the fund with him (fund created with LIC).

Regards,
Daya Anand

As far as we know, gratuity is only applicable after completing 5 years in the organization and can only be paid upon completion of 5 years of service. So, after approximately 5 years, on which salary should we calculate/budget the gratuity? Generally, this cannot be calculated in CTC. There are many employees leaving the company before completing the 5 years. Those companies are calculating gratuity in CTC, which I think is confusing to new joiners.

In some of the comments, we are deviating from the main issue. What are the propositions of law we are not commenting on? The main issue is whether showing the gratuity is ethical on the part of the company or not.

Three Points to Be Kept in Mind:

1. Not showing CTC and paying after the stipulated period.
2. Showing in CTC and paying before the stipulated period.
3. Showing in CTC but not paying before the stipulated period.

Now let us consider the first situation. If the company is not showing the gratuity in CTC and is paying after the required period, the company has considered the long attachment of the employee and paid him as gratitude (what the employee has contributed towards the achievement of the organization).

In the second situation, if the amount is shown and if the same has been kept in some other account, then even in that case there would be no problem in paying the same that has been deducted.

But if the company is deducting the same and not putting it into some other account, then what the company is doing everyone can understand better as all are well qualified and there is no need to explain.

The only thing which I want to say is that if the gratuity has been shown, then it must be viewed as a deduction.

In some of the comments, we have deviated from the main issue. What are the propositions of law we are not commenting on? The main issue is whether showing the gratuity is ethical on the part of the company or not.

Three Points to Consider

1. Not showing CTC and paying after the stipulated period
2. Showing in CTC and paying before the stipulated period
3. Showing in CTC but not paying before the stipulated period

Now, let us consider the first situation. If the company is not showing the gratuity in CTC and is paying after the required period, the company has considered the long attachment of the employee and paid him as gratitude for what the employee has contributed towards the achievement of the organization.

In the second situation, if the amount is shown and if the same has been kept in some other account, then even in that case, there would be no problem in paying the same that has been deducted.

But if the company is deducting the same and not putting it into some other account, then what the company is doing, everyone can understand better as all are well-qualified, and there is no need to explain.

The only thing I want to say is that if the gratuity has been shown, then it must be viewed as a deduction.

Proposition of Law

Dear, the proposition of law is very clear. Gratuity is payable after the completion of 5 years of service, and it's mandatory. No deduction shall be made from wages towards the contribution of Gratuity or Gratuity managed fund. The company has not considered this because of the long service of the company. Earlier, it was the scenario, but after the implementation of the Act, it became a statutory benefit, and in the case of a statutory benefit, there is no choice for the employer.

But now, because of this new concept of CTC, employers are taking advantage of the same because CTC has not been defined in any statute book or having a legal definition.

Regards

I was working for almost 6 years with my firm in Mumbai for one of its MNC clients. I was offered a CTC salary without mentioning any provision for gratuity in my CTC and in my offer letter too. Gratuity and bonus will be applicable to you. Will it be part of the salary? No such thing was mentioned in my CTC or offer letter. Now I have moved to a new organization. Since I had completed more than 5 years, I had to claim gratuity from my previous firm. However, my firm denied me, stating that they are not liable to pay me over and above CTC. They mentioned that gratuity was part of my CTC only and I should consider gratuity as part of my salary, so no separate gratuity will be paid.

As per my understanding, gratuity is applicable on completion of 5 years or 4 years and 240 days. It would be difficult to judge whether an employee will be completing 5 years of continuous service at the time of joining.

I need your expertise and understanding on the same. ASAP.

Thanks and Regards,
D. M. Shah.