Can Employees Receive Gratuity While Still Working Due to Financial Strain? Let's Discuss

Hello everyone. I have a query regarding the actual payment of gratuity for eligible employees.

In my organization, there are three people who have completed more than five years of service as of March 31, 2020. Also, the gratuity was not added to the CTC of the employees while joining, as this practice of adding gratuity in the CTC was creating confusion in the minds of employees in understanding their net take-home salary.

My query is as follows:

1) The employees are asking for their gratuity payment while continuing in service due to a cash crunch. Can this be done?

2) If gratuity is paid now, will it still be exempt under section 10 of the IT Act or be added to income?

3) If the employee continues to work for, say, another six years and as per the Gratuity Act, again becomes eligible for gratuity, then if point 1 is possible, will he be paid gratuity considering six years or eleven years?

4) Finally, is it mandatory to mention the gratuity amount in the CTC sheet?

Please clarify if the above-mentioned points can be addressed.

Gratuity Payment and CTC Considerations

Nowadays, it has become a common practice for many organizations to include gratuity payment, employer's share of PF & ESI, insurance premium (if applicable), etc., in the CTC working sheet to project the total cost to an employee.

Gratuity Payment for Eligible Employees

Regarding gratuity payment for eligible employees, their service is counted until the last working day when they are relieved, including the notice period for which they receive their salary. Therefore, gratuity payment will be calculated from the date of joining the company until the last working day.

Taxation of Gratuity

Gratuity is taxable. The Income-tax Act, 1961 exempts gratuity from tax up to a certain limit. Previously, gratuity up to ₹10 lakh was exempt from tax, which was extended to ₹20 lakh for employees covered by the Payment of Gratuity Act through an amendment in 2018.

Gratuity as a Terminal Benefit

Gratuity is considered a terminal benefit. As mentioned earlier, payment of gratuity is to be made to an employee upon separation (through resignation, termination of services, or retirement as per the provisions of the Payment of Gratuity Act, 1972). Therefore, gratuity payment should not be made to employees while they are still in service with the company.

Q1 No

Adding gratuity to CTC is a wrong practice as it inflates CTC. For internal purposes, the cost of an employee has to be worked out. Every employee may not get gratuity. Some may leave with less than 5 years of continuous service. Gratuity is a terminal payment. It can't be paid in between while in service. Any such payment, if made by whatever name it is called, will be taxable. In case there is a fund problem for the employee, he can draw PF. Some concessions are there due to COVID.

Hope this clarifies.

Gratuity Payment While in Service

My query is the following:

Q.1) The employees are asking for their gratuity payment while continuing in service due to a cash crunch. Can this be done?

Gratuity is a severance benefit payable as per the Gratuity Act/approved Gratuity Scheme. There is no provision for payment of gratuity while in service. This is not possible.

Tax Exemption on Gratuity Payment

Q.2) If gratuity is paid now, will it still be exempt under Section 10 of the IT Act or be added to income?

Subject to the answer to Q.1, gratuity payment when paid is tax-exempt up to Rs 20 lakhs from the previous ceiling of Rs 10 lakhs, which is under Section 10(10) of the Income Tax Act.

Eligibility for Gratuity After Continued Service

Q.3) If the employee continues to work for, say, another 6 years and as per the Gratuity Act again becomes eligible for gratuity, then if point 1 is possible, will he be paid gratuity considering 6 years or 11 years?

If there is a break in service, say after completing 5 years of continuous service, the employee becomes eligible for payment of gratuity. Then his/her continuation is no issue, but to become eligible for gratuity again, they are required to complete 5 years of continuous service. This means it will be considered as a new innings.

Gratuity Amount in CTC Sheet

Q.4) Finally, is it mandatory to mention the gratuity amount in the CTC sheet?

Legally, there are no mandatory provisions established in law with respect to the CTC domain till now. There is no compulsion whatsoever about CTC items. Generally, it's understood that CTC components include gratuity quantum among others, which cannot be quantified upfront, except on a notional basis assuming the emoluments on entry. This again is not a cash cost to the employer during the service, which is a liability to pay, arising only when the service of the employee is coming to a close either on superannuation, resignation, termination, closure, or death.

Dear Madam, due to a cash crunch, some employees who have completed five years of service are requesting gratuity while still wishing to continue in their roles. My views on this matter are as follows:

1. It is not permitted under the provisions of the Payment of Gratuity Act/Rules, as gratuity is only payable upon ceasing to be an employee due to termination of service or death.

2. If paid as gratuity, it would be illegal. The legal aspect has been clearly explained by my learned colleagues.

3. If the company still wishes to provide a benefit, it could consider paying under a different category such as ex-gratia, but this may attract taxation implications.

Another option could be for the employees to resign, receive all dues including gratuity, and then rejoin as fresh employees. There is no legal issue in determining what should constitute the Cost To Company (CTC). Gratuity is commonly considered as part of CTC, which is appropriate as it becomes payable upon an employee's death even before completing five years of eligible service.

Considering the legal implications and employees' expectations, I suggest you make the appropriate decision.

Regards, Vinayak Nagarkar HR and Employee Relations Consultant