Is Gratuity Payable as Ex-Gratia if Included in CTC but Less Than 5 Years Worked?

I have worked for a large organization for four years and five months, which is less than the period stipulated under the Payment of Gratuity Act, 1972. However, as per the terms of appointment, gratuity is included in my CTC as a specified amount that is not paid during the employment period. It is also stated that it is payable subject to the rules, and "rules inter alia" refers to the stipulated period of four years and 190 days.

Would this gratuity become payable as 'ex-gratia' to me even if I have not completed the stipulated period of five years since it is included in my CTC?

Gratuity becomes payable if you serve 5 continuous years in the organization.

In your case, service is only 4.5 years. In my opinion, you are not entitled to gratuity, even if gratuity is included in CTC.

Thanks for the reply. Is it not unfair and illogical to apply a 5-year period even if gratuity is part of the committed CTC and a specific amount is allocated towards the said gratuity? Also, though specified separately, it is not paid during the continuance of employment. There was no need to mention this in the compensation package as gratuity will otherwise also become payable after five years.

I received ex-gratia (instead and in place of gratuity) from my previous employer where I worked for two and a half years. There also, gratuity formed part of my CTC.

Mr. Shah,

Please understand CTC as applicable to any employee. Cost to company is an amount forecast by a company as a salary but is not the same as received by the employee. Gratuity legally becomes payable only after 5 years of continuous service. Ex gratia payments are those payments which have no legal compulsion while gratuity is legally mandated.

Understanding CTC and Gratuity in Employment Contracts

The term CTC is a little confusing, and most organizations today make CTC as an offer. They include gratuity without specifying conditions regarding gratuity. We need to find a legal answer to this question only by moving to court. This obviously cannot be claimed under the Payment of Gratuity Act. But surely, this forms part of the employment contract and is governed by the Indian Contract Act.

In my opinion, if there is no condition specified like gratuity under The Payment Of Gratuity Act, 1972, or payable if one completes 5 years, then one can reasonably presume that this component is payable under the Contract of Employment. No one has gone to the court yet, and one needs to move to the Civil Court for this purpose.

CTC

What you see is not always what you get, especially in the case of CTC. Basically, one needs to understand that CTC is what the company says it will spend on you; the take-home is the amount you get in hand after tax. When an employee joins a company, the company proceeds on the assumption that they will be there for a few years. Therefore, including legal payments that may arise after a few years is also considered for making provisions for subsequent payments if they arise. I feel there is a need for people to read the CTC package carefully and then accept the offer if they feel satisfied.

Supplementing what Mr. Nathrao has mentioned above, candidates who look at the total package assume that they will receive the entire amount (CTC) in some form or another. However, there are riders to it. It is like applying for a credit card; we do not read and understand the clauses and conditions incorporated. We do not ask pertinent questions and seek clarifications. If we do that, such problems do not arise. However, some components in CTC go by certain assumptions. Therefore, before signing on the dotted lines, it is better to read, understand, and get satisfied and convinced!

I would like to present this issue from a different angle.

Cost to Company (CTC)

COST TO COMPANY is essentially an internal document detailing the workings of the organization. It covers the legal obligations and its liabilities. It provides clear ideas to both parties, i.e., the organization and the employee, and is a part of the appointment letter/contract.

Gratuity and Employment Termination

Now, the question arises about the reason for leaving the service before the completion of 5 years. If employment is terminated/retrenched/closed by the company, then retrenchment compensation is required to be paid by the company to the employee. This is equivalent to the Gratuity amount, even if the services are below 5 years, which is never considered or mentioned in CTC. If an employee leaves the job on his/her own before completing 5 years of service, no Gratuity is applicable.

Hence, unless there is a specific understanding in writing, the indirect benefits/costs, even if mentioned in CTC, are payable as per the law only.

Regards,
Pramod Thakar

Gratuity becomes payable if you serve 5 continuous years in the organization.

I received ex-gratia (instead and in place of gratuity) from my previous employer where I worked for 4.3 years. There also gratuity formed part of my CTC.

He may raise a suit in civil court in terms of the contract, but it is not enforceable as per the Gratuity Act.

Yes, it is true that we cannot claim under the Gratuity Act until completion of 5 years; only then will it be applicable.

Thanks, everyone for your valuable responses.

Would I be able to take any action, including filing a suit under the Indian Contract Act, if I accept my full and final settlement, excluding gratuity/ex-gratia? Also, even if I have provided "no due confirmation" while accepting the said full and final settlement?

Dear Dharmendra Shah,

You can file a suit asking for gratuity, but it will most likely be dismissed. What is the point of spending money on an advocate for an amount you are not entitled to? One must move on and focus on the next job or present job. Sometimes you win, and sometimes you lose. Accept it as a part of life.

Best wishes.

I concur with Mr. Nathrao. Perhaps the inclusion of the gratuity amount in the CTC might have prompted this question. CTC is the sum total of every component of expenses, both direct and indirect, incurred by the employer towards an employee on an actual and accrual basis.

Understanding Gratuity

Gratuity is a lump sum payment on termination of employment due to certain specified reasons. It is actually a fringe benefit earned by the employee based on a blemishless record and a specified number of years of service under the same employer. Therefore, it cannot be an ex-gratia subject to the discretion of the employer. Moreover, no ex-gratia can be claimed as a matter of right.

In the last post, there was a mistake; the changes are as follows:

Hence, unless and until there is a specific understanding in writing, the indirect benefits/costs, even though mentioned in CTS, are NOT payable as per the law only.

Regards

Gratuity Act Applicability

The Gratuity Act is applicable to all establishments where the number of employees is 10 or more on any day of the preceding 12 months. Only Basic and Dearness Allowance should be considered as wages for the purpose of gratuity.

Gratuity Payment Formula

The gratuity payment formula is as follows: For example, if an employee leaves the company after 10 years and their last Basic + Dearness Allowance is 10,000, then their gratuity will be calculated using the following formula: (10,000/26) * 15 * 10. Please note that the above formula remains the same regardless of whether the employee works in a 5-day-a-week establishment.

Claiming Gratuity Before Completing 5 Years

An employee can claim gratuity even before completing 5 years in the following cases: Death (to their nominees) or Disablement. However, the quantum of gratuity will be as per the act.

If the terms of appointment mention that the portion of gratuity from CTC will be payable to you if you complete > 5 years of service, then the employer is liable to pay. In case you want to claim the same, you will have to seek a remedy.

Understanding CTC and Its Implications

Our member Nathrao has correctly mentioned that the CTC package should be carefully read by the new joiner before accepting the offer. However, the new joiner may not know what CTC means or the difference between CTC and salary. In one of my old posts, I mentioned that even the HR fraternity itself is confused about this concept. Given this circumstance, how can we expect the employee to understand the CTC concept? I have observed in many instances that employees are confused on this aspect by HR personnel.

Senior member Shri. Umakanthan has rightly said that CTC is the sum total of every component of expenses, both direct and indirect, incurred by the employer towards an employee on an actual and accrual basis.

I have written about CTC in many previous posts, and I would like to reiterate it in addition to what Shri. Umakanthan has stated. CTC is not salary; it is a concept. It represents the total "Cost To Company" for the engagement of an employee on an actual and accrued basis.

The cost of Gratuity is included in CTC to cover the provisions of the gratuity liability. The employer is obligated to make provisions for the liability towards Gratuity in their accounting books based on actuarial calculations. Alternatively, the employer may opt for a Gratuity Policy, where they have to pay the premium for each employee from the date of joining, based on actuarial assessments, regardless of whether the employee completes 5 years of service or not.

It is not incorrect for the employer to include the gratuity liability in the CTC. However, Gratuity is payable to the employee only after completing 5 years of continuous service, except in the case of death. This information should be clearly explained by the company or HR personnel to the employee.

To avoid any ambiguity, my advice is to include a footnote in the CTC structure stating that Gratuity is payable only after completing 5 years of continuous service, and there will be no refund of the money accounted for as Gratuity liability in the CTC if the employee leaves the services before completing 5 years of continuous service.

Regards