Gratuity in CTC: Do Employers Have to Pay If Service Is Less Than 5 Years?

Gratuity Payment Obligation

As per the Gratuity Act, gratuity is payable only after an employee completes five years of continuous service. Is it mandatory for an employer to pay gratuity to an employee (who has not completed 5 years) if the employer includes it as a part of CTC in the appointment letter?

Please help.

Regards,
Manoj

Hi Raju,

The gratuity can be applicable even before the completion of 5 years if the employee has worked in the organization for at least 240 days in the fifth year.

Regards,
Manoj

I would like to add that if the CTC is inclusive of the gratuity contribution, then it is paid as ex gratia (taxable) if the service is less than 5 years. If it is over and above the committed CTC, a separated employee is not eligible unless they complete 5 years of service with the company. They do not have the right to ask.

Regards,
SVS RAO

Thanks, Mr. S. VIJAYASIMHARAO,

Is it mandatory to pay this ex-gratia amount? Is it mentioned in any notification? Please provide the copy if any. Please help.

Regards,
Manoj

Dear Sri Manoj,

The payment of ex-gratia is not mandatory if the Gratuity deduction is not part of the CTC. However, if it is part of the CTC, as it is the money of the employee, the employer releases the gratuity amount by way of ex-gratia (by deducting applicable income tax) while preparing F & F as a part of good corporate governance. To the best of my knowledge, nowhere is it mentioned in the Act. Most corporate companies have now migrated to the CTC concept (even by including employer contribution of PF Deduction).

If the committed CTC is not inclusive of Gratuity (4.88%), then the employee becomes eligible for Gratuity after completing 5 years of service with the company, as per the Payment of Gratuity Act. I hope you are aware of the latest amendments in the Gratuity ceiling, i.e., Rs. 10.00 Lakhs, the details of which have already been shared by our team members in our recent threads.

I hope all team members agree with my above view.

Regards,
SVS RAO

I was working in an organization from 20th June 2007 until 2nd February 2012. Would I be eligible for gratuity? Also, gratuity was a part of my CTC in the organization. If yes, how can I apply for the same? Kindly revert ASAP if I have to complete any formalities within 30 days of my last working day for it. Please help.

Regards,
Sapna

The problem with the concept of CTC is that there is always an underlying message which says "Payable as per the provisions of The Payment of Gratuity Act," and there is no provision in the Act to provide any ex-gratia payment. It is totally based on the policies of the company.

Regards,
Preetam Deshpande

Every company projects the cost of employees annually in their budget. They display it in the Total Cost to Company (TCTC) section of the employees' appointment letter. There is nothing wrong with this practice. The company calculates gratuity for the allocation of funds. An employee becomes eligible for gratuity only after completing 5 years or more of service and resigning.

Thank you.
Regards