Why Is Gratuity Included in My One-Year Contract's CTC When I Won't Receive It?

I have received an offer letter from an organization for a one-year contractual employment. The contract may be extended subject to my satisfactory performance and the organization's needs. In the salary break-up (CTC), the organization has mentioned that gratuity will be deducted. However, if my contract is not extended, then I will surely lose my gratuity contribution. Even if the contract is extended for one or two years, I will still not receive my gratuity.

Question About Gratuity in CTC

So, my question to members is: Why is the organization accounting for gratuity payment in CTC when it is very clear in the offer letter that the offer is only for one year? Looking forward to your inputs.

The CTC concept has been discussed in this forum on many occasions. You need to first understand the concept of CTC and CTC & salary. Please note that CTC is different from salary.

Reference Link for CTC and Salary

I am providing below one of the links on this subject for your reference: https://www.citehr.com/453456-pf-con...ncashment.html

You can explore the subject and find many similar links/discussions that may help clarify your understanding of the concept of CTC and salary.

Understanding Gratuity Deductions in Contractual Employment

Truly an awesome question. Gratuity is only deducted if there is no contract. If there is a contract, then the gratuity component is not applicable. If a company is terminating your employment, they are required by law to pay the gratuity. Hope this information helps.

Thanks,
Deepa

Blogs - Famous Great All In One http://famousgreatandall.blogspot.com/

Hi, I agree with the points that some of our friends have raised regarding calculating gratuity in the Cost to Company (CTC). On one side, CTC refers to every cost borne by the employer towards the employee, which includes the employer's contribution to Provident Fund, ESIC, Mediclaim, Gratuity, etc.

Gratuity Calculation Concerns

But technically, if we consider that gratuity is payable upon completion of 5 years of service or in the unfortunate event of death/disability during employment, gratuity is calculated based on Basic Salary + Dearness Allowance at the time of completion of 5 years or in the event of death/disability.

The point I want to highlight is how can we calculate and deduct gratuity when we do not know what the Basic Salary + D.A will be upon completion of 5 years or in the event of death/disability.

Regards,
Vivek Sharma
HR Manager

In many organizations where the Cost-to-Company (CTC) concept is followed, gratuity is part of the CTC. If an employee leaves the organization before completing 5 years, the accumulated gratuity amount is paid as ex-gratia. Employees do not lose any amount that is shown in the CTC statement.

Thank you all for your inputs. I don't have any intention to stretch this thread long enough. But the point that I wish to highlight is that, for example, an organization is offering a CTC of Rs. 5 lakhs on paper (which includes PF, Med., Gratuity, etc.), out of which gratuity is, say Rs. 10,000 p.a. Since the contract is for one year only (although with a possibility of extension for 2-3 years), the practical possibility for an employee to realize that Rs. 10,000 is literally zero. Hence, the actual CTC is Rs. 4.9 lakhs instead of Rs. 5 lakhs, as claimed by the employer. I hope this clarifies my point.

If anybody can explain whether it is legally correct for a company not to provide gratuity benefits to employees, I would appreciate it.

Dear Sean123,

I appreciate your post. As I said, CTC as a Concept

CTC is a concept adopted by the employer. What is considered a cost to them is their prerogative. The employer has to make a provision for gratuity every year and needs to include all employees from the first day of their employment, irrespective of their tenure. The employer is required to invest in the Gratuity Fund according to the provision. Therefore, the employer takes this amount invested per employee as a cost in the CTC structure.

The employer is not wrong in considering this cost in the CTC structure. However, I feel the employer is not conveying this concept to employees properly. Rather, I would say the HR fraternity has not understood this concept, and they have no interest in understanding it, as far as I have seen, for reasons best known to them.

You, as an employee, should concern yourself with your salary package. However, at the time of salary negotiation during the interview, one has to negotiate CTC vis-a-vis their CTC with the earlier employer and demand accordingly. HR professionals should play their role skillfully. But if they are in a confused state of mind...?

Regards.

Gratuity is an additional payment that can be availed after the completion of at least 4 years and 240 days. Whether the employment is permanent or on contract, if someone has worked in an organization for at least the above-mentioned days without any service break, they are eligible to avail the benefit.

Understanding CTC (Cost To Company)

Regarding CTC, it is a term that does not have a legally justified definition. It is a calculation that includes every direct and indirect expense incurred by an organization towards a particular employee during a financial year, and every organization has its own way of calculation. Frankly speaking, it is a very diplomatic term, which is as good as bad.

Regards

My submission to the above is as follows:

1. In order to earn gratuity, an employee has to render not less than 5 years of service.
2. In case of death or disablement, gratuity is payable even if the service is less than 5 years.
3. I am aware of the judgment of Madras HC, and I have given my views on it in this forum earlier.

Regards

I am in agreement with your question. However, in the industry, the concept of CTC is prevailing. As pointed out by Dilip above, you should discuss with the prospective employer that in the event you are not required to serve the company for the tenure of five years (the qualifying period for the payment of gratuity) due to no misconduct on your part, they should reimburse you the deductions made towards gratuity as ex-gratia, following the prevailing practice elsewhere.

Regards,
S.K. Johri

Understanding Gratuity in CTC

Gratuity component in CTC is calculated and apportioned at 4.8% of Basic Pay plus DA. So, if the basic plus DA is, say, Rs. 10,000 per month, then the gratuity component, if apportioned in CTC, will be Rs. 480 per month.

Statutory gratuity will be payable to an employee upon separation, other than death, if they complete at least 5 years of service in the organization.

Where the contract of engagement is only for one year, the organization should reimburse the amount apportioned for gratuity in the CTC to the employee if their contract is not renewed beyond one year. This amount is part of their CTC, which the organization has committed to remunerate them. However, if the contract is extended and the employee serves the organization for a cumulative period of 5 years due to successive renewals, then they will be eligible for gratuity payment as per the law. This payment will be calculated based on the basic salary they would be receiving at the time of final separation.

Thanks.

Regards, G. Hari