Gratuity in CTC: Can Employees Claim It Before Five Years of Service?

We are showing Gratuity as a part of CTC while issuing the Appointment Order. Can an employee claim payment of Gratuity before completion of five years of service on the grounds that this is a part of CTC?

Thanks,
Ajee Morolia

Hi Ajay,

It's not possible because it's beyond the law. Then, even one may claim for Pension fund also as it's also a part of CTC, which is not possible. CTC includes so many contents, and even we actually don't get benefited from all the contents.

Regards,
Amit Seth

My dear, if you include the Gratuity amount in CTC, it definitely becomes a part of your salary, and the employee can ask for its payment if they leave the company before completing 5 years. This is a prevalent practice in the industry. As far as the payment of PF is concerned, the amount directly goes to the employee's account, and they do not have to ask the employer for payment.

Regards,
H R Singh

Dear Ajay,

In continuation of Amit's comment, he is right. Not all parts of the CTC are received by everyone. CTC stands for Cost to Company; it represents the employer's cost of keeping an employee on its payroll. It does not mean that everything mentioned in the CTC will be payable to the employee.

Hi Moralia,

We can stop the payment of gratuity on certain grounds, even though it is a benefit to an employee and part of CTC. Therefore, he cannot claim it.

Sirisha.

Mr. Peer,

Your contribution is remarkable. The principle is that no one can supersede regulations and acts. The same principle also governs this issue.

Thanks,
Ajay Morolia
8) 😉

Dear Member,

Payment of Gratuity is a statutory obligation on employers. It is payable upon the completion of a minimum of 5 years of continuous service on retirement, resignation, or death. The condition of 5 years of continuous service is not applicable in the case of death.

According to the law, the company is liable to pay only if the employee has rendered a minimum of 5 years of service. This payment is made in recognition of the continuous service the employee has provided to the organization, and if the employee leaves before 5 years, they are not eligible to claim gratuity.

However, the Payment of Gratuity Act, 1974, envisions compulsory insurance of the employer's liability to pay gratuity. This cost is obviously included in CTC. It means it is the cost borne by the employer to keep the employee in their establishment.

Hi all,

I agree with all the valuable comments above. As per the Gratuity Act, gratuity has to be paid by the company after completion of 5 years of continuous service. However, the company can formulate its internal policy and pay the gratuity even before the 5-year term. If the internal policy is silent about this, in that case, the company is liable to pay after completion of 5 years of service. In short, it can be early but not late. That is what my understanding is. I hope I am correct.

Regards,
Prasad

Hi,

It has been agreed in principle that gratuity is a part of CTC. The annexure you attach with the appointment letter showing the breakup of salary should mention that gratuity is payable as per the Gratuity Act, 1972. This will take care of the perceived problem you feel you may face.

Regards,
Subrato

Hi,

This is an interesting question: whether the inclusion of gratuity in CTC would make an employer liable for payment if an employee leaves the organization before fulfilling the eligibility criteria under the Payment of Gratuity Act.

I believe this question requires an in-depth study. In my view, if an employer has not specifically mentioned 'gratuity' as per the Payment of Gratuity Act in the CTC, an employee can claim this as a simple contractual obligation. The employee may argue that it is a part of their salary that was negotiated and agreed upon at the time of appointment. Under the contractual obligation, the employee has the right to leave the employment, or the contract can be terminated by the employer. In this circumstance, the employer cannot refuse to pay the gratuity amount even if the employee has not completed five years of service.

The situation would change if the employer specifically mentions 'gratuity' as per the Payment of Gratuity Act in the CTC.

I am open to correction. However, I believe one can raise the above plea and legally contest it.

Cyril

Cyril

Dear Ajay,

If gratuity is included in your CTC, then the employer has to pay the gratuity to the resigned employee even if he leaves within 5 years. It is specified in the appointment letter with respect to gratuity, whether to be paid only after completion of 5 years or it is mentioned in the salary structure, i.e., CTC.

In my company, gratuity is included in CTC. It is calculated as 5% of Basic.

Regards,
Nimish Joshi

Hi,

As far as my knowledge is concerned, gratuity cannot be part of CTC. It is not a deductible amount from CTC; rather, it is an additional burden on the employer's part, which has to be paid to the employee, and the time limit is 5 years with no exemptions.

Please correct me if I am wrong.

Regards,
Sharad

I would like to second the opinions of two of my colleagues, namely HR Singh and Santosh Kumar. Both are correct.

Today, many companies are paying the gratuity component every year rather than at the end of five years as stipulated by the law.

Surya

Dear Ajee,

With regard to the above-mentioned, there is no need to request payment for gratuity before completing five years of service. The component shown in the CTC is part of the employer's contribution. No employee is eligible to claim against it before the specified years in the respective law. Yes, only in the case of demise can you go ahead with a gratuity claim.

CTC represents the actual earnings of employees from the company and the employer's contribution, so portraying gratuity is not an issue, but it is impossible to claim before the fifth year.

Regards,
Christopher.

Dear Ajee,

If you are including gratuity in his CTC, that means you have liabilities to pay to the employees. The Act is applicable only after completion of continuous 5 years. So, in case of leaving before 5 years, you have to pay the amount of gratuity which you have shown in his CTC.

Girish

Dear,

How do you include Gratuity in the appointment letter to signify the payment terms? Nowadays, it has become customary to display the statutory payments made to employees as part of the CTC, where they are placed under the appointment terms. In my opinion, this practice is incorrect.

If you include it in the appointment letter, it falls under the law of the contract, and employees can request Gratuity claims and even PF claims since the amounts shown in the Gratuity column often exceed the statutory provisions in most cases.

To be on the safe side, even if statutory payments are considered in the CTC, they should be accurately worded when included in the appointment letter.

Regards,
Vinmind

Dear All,

Let me first congratulate all of you for having a good discussion on the Cite HR forum.

I see this issue as an understanding issue and a company's perspective issue.

1. As everybody is aware, gratuity is payable under the Payment of Gratuity Act 1972. It can be paid based on a certain formula after the completion of 5 years of continuous service.

2. It is the company's choice to include or exclude it in CTC calculations. If any organization includes it in CTC, it is important to understand what cost to be taken. Some companies take it at 5% of basic wages (on which PF is deducted), some take it at 8% of basic wages.

3. Another method to calculate the cost of gratuity for CTC calculation is to take the actual cost incurred by the employer for insuring (if insured) the benefit of gratuity (which the employer pays to any insurance company every year as the premium of the insurance policy). This cost the employer doesn't save even if any employee leaves the organization before 5 years. This can be justified to any employee if he claims gratuity before completing 5 years of service on the pretext of CTC basis.

4. The employer is not legally bound to pay gratuity before the completion of 5 years of continuous service. Therefore, the employee cannot claim it, even if it is being included in CTC.

5. In the end, everything depends upon the company's policy. You can pay anything you want or negotiate. No law stops you from paying more than statutory norms.

Regards,

Sameer

Dear,

This mail is not related to any personal comments or remarks, so please take it as a point of discussion.

Correct me if I'm wrong. I think Gratuity contribution is borne by the Employer, not by the Employee, and that it is 4.81% of the basic, not 5%. Is it correct or not? Please let me have the view of the Seniors.

Dear Kunal,

You are absolutely correct. In CTC calculations, companies usually round it to the nearest integer.

Sameer

Hi Ajay,

It is not advisable to include gratuity payment in CTC. It is always uncertain whether the employee will receive gratuity or not as they need to serve 5 years in an organization to become eligible for gratuity. Furthermore, the gratuity calculation of an employee depends on how many years they have served in the organization. You cannot presume how many years an employee will work in your company. So, it is better not to include the payment of gratuity in CTC while giving the offer letter. It should be shown in some miscellaneous head.

Regarding your second query, in no case can an employee claim gratuity without completing 5 years of service, which is statutory.

Srihari Rao

Hi,

CTC means Cost to Company or how much cost is being incurred by the company towards the individual employee. Gratuity is also a cost that is incurred by the company from Day 1, irrespective of whether the employee is going to stay in the company for 5 years or not and hence has to be shown in the CTC workings. The company has to set aside 4.8% of the Basic Salary of the individual towards Gratuity.

You need not specifically mention in the CTC workings that Gratuity would be paid as per the act - it is understood.

Generally, when an employee is selected and the salary negotiated, the other benefits that are applicable to the employee like Bonus, Leave Salary, etc are discussed, and he is also told that Gratuity calculation would start from the first month itself. So there is no way that he can claim Gratuity if he leaves before completion of 5 years.

The problem is that CTC is loosely mentioned in place of salary. CTC is what the company is bothered about while calculating the Wages & Salaries Cost and the employee should only be bothered about the Gross Salary and Benefits he gets.

Regards,

Vasudev

Vasudev is one hundred percent correct on all counts. CTC may, and normally does, include all expenditure that the employer incurs on behalf of the employee. Though different companies include different elements in the calculation of CTC, and though you will never find it clearly defined anywhere, CTC normally includes elements that are paid to the employee by way of salary and various allowances, AND also other expenses the employer incurs on behalf of the employee to comply with various legal provisions. Some typical examples are: Employer's contribution towards Provident Fund, Gratuity, Leave Encashment (unfair, but many companies do it), Mediclaim premium, Group Insurance premium, estimated annual bonus, etc.

As some members have already pointed out, many of us confuse CTC with pay and allowances, and hence feel that all the amounts mentioned in the breakup of the CTC are payable to the employee directly. However, this is not the case, as already explained by many.

Hi all,

It's a good discussion going on. As pointed out by many, not all payments mentioned in the CTC are directly paid in cash to the employee. CTC represents the cost incurred by the company in retaining the employee, which is correct. According to the law, you cannot exclude the payment of gratuity to an employee, but it also does not prohibit you from paying more than the minimum stated in the law.

If the payment terms are included in the salary structure agreed upon by the employer, then it becomes mandatory for the employer to follow. The wording in the appointment letter is crucial, so it is advisable to be clear when specifying it in the pay structure.

It would be helpful if anybody could provide information or references regarding any case law or court decisions on the discussed issue.

Regards,
Anshuman

Hi Ajee,

Since gratuity becomes due to a person subject to his completing five years of continuous service, a person cannot legally claim it if he separates before the eligibility period, although it might have been indicated in his CTC.

gnmattoo

Dear Friends,

Gratuity in the meantime is only statutory. We have to follow the Payment of Gratuity Act. But if you want to do as per your company's rules, that is immaterial itself. As per the law, any person who has completed five years of service in a particular company will be eligible for gratuity. If you put it in CTC, any labor department people are asking how we can show it.

The formula is as follows: Basic + DA x 15/26 x Number of years of service (minimum 5 years).

For further details, please refer to the Act. (A brief note is attached with this.)

Regards,
PBS KUMAR