Is Gratuity Part of CTC and What Happens If You Leave Before 5 Years?

Can anyone tell me if gratuity is part of CTC or not? Also, if it is deducted from the salary, should it be given back to the employee if they leave the service before 5 years?

Regards,
Vinay

Hi, it's not deducted from the employee's salary; it is an obligation that must be paid by the employer to employees who have completed 5 years.

Hi Vinay,

Understanding Gratuity

Gratuity is a reward, service, or payment provided freely, without obligation. In common usage, it is an additional charge placed for services rendered; see also: service fee. [Source: http://en.wiktionary.org/wiki/gratuity]

Gratuity is a part of the salary received by an employee from their employer in gratitude for the services offered by the employee in the company.

Eligibility

As per Sec 10 (10) of the Income Tax Act, gratuity is paid when an employee completes 5 or more years of full-time service with the employer.

I'll illustrate with an example: Suppose you are going to a restaurant for dinner. Having looked at the menu, you have estimated the bill that is coming. Accordingly, you also know what kind of tip you would leave for the waiter. (Usually, we leave a 10-15% tip as a reward for the service given, so just an estimate).

Now, the tip that you are giving is like a gratuity. You keep aside that money or make a fund of it so that you know at the end you’re to give it to him. You are also aware that if the bill rises, you may have to shell out some more, and it would also depend on the time that the service is rendered. (One can’t pay an equal tip to a waiter who has been serving you well for, say, 5 hours as much as you’d pay to one who was with you for, say, a couple of hours, right?)

Now, though the bill was X and you paid Y as a tip, the total cost for food, the total expense you incurred on food was X+Y, right?

So understand that CTC is the cost to the company, and they have the right to put up all the costs in your CTC that they spend for you or give you (either in cash or kind or whatever means).

Deductions

Deduction is different. Deduction means it is a part of the salary but has legal deduction implications. Deductions would include your PF, Professional tax, TDS, deductions against advance salary/loan availed, etc.

I hope you’re clear on the fact that Gratuity & Deductions are different.

Payment of Gratuity Before 5 Years of Service

See this again with the same hotel example. Paying a tip is not obligatory. In simple words, it is not a golden rule to pay a tip to a waiter, as it is his duty to serve us and is paid for it by his employer. But we pay a tip for the good service they provide us, out of goodwill.

So gratuity is not an obligation on the employer’s part. It is just like a reward. You can’t force someone to give you a reward, right?

Another thing... say, for example, the waiter was not with you all the time, he didn’t give you a welcoming experience, the service was not up to the mark, lots of wait time and food not that great, service and etiquette not that great, you don’t put a tip.

In a similar fashion, how can we expect our employers to pay us a gratuity when we are not providing them continuous service?

Moreover, even the law or the Gratuity Act says - we become eligible only after 5 years of service. However, if someone is resigning after a minimum of 4.8 years of service, they are eligible to claim gratuity. Again, if an employee meets an accident and is fully incapable of performing tasks or meets death while in employment even before 5 years, the employer pays him/her gratuity for the served period in those exceptional cases even before 5 years.

(Please note that I didn’t mean to compare you with a waiter; it was only the best and simplest example I could think of to explain this thing. Please don’t take it personally.)

For any further clarifications, please feel free to post 

Wish you luck. Hope it helped. 

Regards

Gratuity is a liability for the employer to be paid to the employee if they render 5 years of service in the organization. Hence, employers calculate gratuity and include it as part of CTC, showing it as part of the pay package. The calculation is as follows: Basic Salary X 15/26 gives you the gratuity payable per annum, which is then divided by 12 months and included in CTC per month.

Some companies also have agreements with LIC of India under the Group Gratuity Scheme. The employer contributes to the Gratuity fund, and LIC pays gratuity based on a claim from the employer. Therefore, although it is shown as part of CTC, it is neither paid monthly to the employee nor deducted from their salary.

Whether gratuity is paid even if employees leave the organization without meeting the 5-year eligibility criteria depends on how generous the employer is. Generally, employers pay gratuity only if the employee qualifies, with an exception for cases of death.

Regards,
M.V. Kannan

Thank you very much. In our case, the employer is deducting Gratuity at a rate of 4.81% from the basic salary. If an employee leaves after 2 years, they must be paid the deducted gratuity amount.

In another scenario, if employees are paid according to the rules after 5 years, the deducted gratuity for the 5 years may be lost.

Regards,
Vinay

Gratuity Component in CTC Fixation

Generally, in the CTC fixation, the Gratuity component is included. However, anybody separating before rendering continuous service of 5 years is deprived of this payment, which is permissible both legally and otherwise. Please remember that though it is a part of CTC, no such dues are recovered from the wage period salary.

There are good companies that pay back proportionately at the time of making full and final settlement. The reason being it was a commitment made by them while fixing/negotiating CTC before joining.

Regards,
B.K. Mohanty
Advisor and Senior Consultant
[Phone Number Removed For Privacy Reasons]

Dear Vinay,

First of all, let us understand this. You are hired by the employer for a specific purpose. He has to spend on various things besides paying the monthly salary, and those expenditures need to be accounted for in the budget. The term CTC was coined to encompass the expenses incurred for you during the period of employment.

Generally, when a person joins a company, both parties aim to continue the contract for a longer period for their mutual benefits. With the enforcement of more labor legislations, the employer is obligated to pay compensation to the employee for completing a certain period of employment.

Since those future expenses are the employer's liability, they must forecast and accommodate those expenses regularly to ensure they do not default in making the final settlement for a departing employee. Therefore, do not confuse salary with CTC. Remember that Gratuity, Bonus/Ex-gratia, Retiral Benefits, and the employer's contribution to PF are not deducted from the employee's salary but are part of their CTC.

Gratuity Payment and Eligibility

Now, let's address your query about leaving the job before five years and the applicability of gratuity payment thereafter. Since gratuity is not deducted from your salary, the employer is not obligated to pay it if you do not meet the minimum eligibility criteria as per the existing Gratuity Act. The budget remains a plan and is not executed if the contract is breached by one party, preventing you from claiming gratuity.

I hope this clarifies your doubts.

Regards,
P. Vathiraj
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