Gratuity in CTC: Can You Claim It If You Leave Before 5 Years?

Dear Seniors, I have one query regarding the Payment of Gratuity. In many organizations, gratuity is included in the CTC, and each month it is deducted from the salary. Now, suppose an employee leaves a company without completing 5 years of continuous service, how can the employee claim the Gratuity?

Thank you.

Gratuity Claim Eligibility

No claim for gratuity without completing 5 years. There is no deduction of gratuity per month; it is just a provision in the books of accounts through actuarial valuation. The gratuity element is shown in the CTC to calculate the total cost to the company of employing one person. Hence, you cannot claim gratuity without completing 5 years of service.

It depends on the company, and I hope you had clarity at the time of joining.

Gratuity Claim Process

To claim gratuity as per The Payment of Gratuity Act, you must complete a minimum of 5 years of service, including leaves and holidays. However, some organizations that prioritize employee welfare allow withdrawals if someone resigns or leaves the job even before completing 5 years. For this, you need to seek clarity from your HR department. (We allow our employees who leave before 5 years to claim gratuity.) If they allow it, you may apply using Form I at http://pblabour.gov.in.

About Deductions

Many organizations include gratuity as part of the CTC, so terming it as a deduction would be incorrect. Instead, it is a component of the CTC that the organization must accrue as per AS 16 (Accounting Standard 16) and make provisions for. However, the organization is not liable to pay it if the employee has not completed a minimum of 5 years of service.

Regards,

Understanding the Gratuity Act

The Gratuity Act states that gratuity is the goodwill of an employer towards an employee who has stayed with the organization for a longer period, which is typically 5 years. In the event of the employee's death or permanent total disablement, gratuity should be paid before the completion of 5 years.

Ideally, the gratuity component should not be deducted from the monthly salary. If it is deducted, the deducted amount should be refunded in cases where the employee resigns.

Regards

I agree with Sh Dixon that most reputed companies create an "Actuarial Valuation of Gratuity Liability" to calculate the total cost to the company (CTC) for employing a particular person. However, gratuity is payable to employees only upon completion of five years, except in the case of death or disablement.

Regards,
BS Kalsi
Member since Aug 2011

Understanding CTC vs. Salary

Please do not get confused between CTC and Salary. CTC is the estimated Cost to the Company for employing a person and includes all expenses the employer incurs or may have to incur in the future for employing an employee. If anything is shown in CTC, it does not mean that it gets deducted from the salary.

Gratuity Claims and Service Requirements

There cannot be any claims for gratuity without completing 5 years. There is also no deduction of gratuity per month; it is just a provision in the books of accounts. The amount is shown in the CTC to calculate the total cost to the company of employing one person. Hence, you cannot claim gratuity without completing 5 years of service.

Exceptions to the 5-Year Rule

In case of death, permanent disability, retirement, or retrenchment, it is different. Gratuity is usually paid.

I would like to correct you where you have mentioned in the last sentence of your mail that "In case of death/permanent disability/retirement/redundancy, it is different. Gratuity is usually paid." I would like to invite your attention towards Section 4 of the Payment of Gratuity Act, 1972, which states that 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. Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

The exception for putting in five years of service is only available in cases of one's death or disablement due to accident or disease and not otherwise. In the case of retirement or redundancy, a period of five years is required to claim the payment of gratuity.

Regards,
BS Kalsi

Dear all,

Good morning!

Is there any notification or judgment wherein the gratuity notification states that we cannot add the gratuity amount to CTC? If it's a part of CTC, can an employee enjoy it without completing 5 years?

Looking forward to your prompt response along with any Supreme Court judgment or gratuity notification.

Thanks & regards