Gratuity in CTC: Do We Need to Pay if an Employee Leaves Before 5 Years?

Dear Seniors, we have included gratuity as a part of the CTC, and it is clearly mentioned in our offer letter. Therefore, we would like to inquire whether it is mandatory to pay gratuity if an employee decides to leave before completing 5 years of service. Thank you.

If an employee has not completed 5 years or 4 years and 7 months, he is not eligible for gratuity; therefore, there is no need to pay.

As per the Payment of Gratuity Act 1972, there is no need to pay gratuity to him because he has not completed 5 years of service.

Thanks,

We have shown gratuity as a part of his CTC, as mentioned in his offer letter, and we are deducting a certain amount every month.

Thank you.

Your query is not clear. As per the Gratuity Act, you need not pay gratuity to him because he is not eligible. However, you had mentioned the amount in the offer letter/appointment letter as part of CTC. Therefore, you are liable to pay gratuity as per the contract. He can't claim gratuity under the Gratuity Act, but he can claim it as per the contract.

Thanks,

Understanding CTC and Gratuity Eligibility

CTC means Cost to Company, hence all the costs which the company/organization/establishment is spending on the premium should be considered in the CTC. If an employee does not complete the basic requirement of eligibility of 5 years of service (4 years and 240 days), then he/she is not eligible to receive anything under gratuity, even if it is mentioned in the CTC annexure attached with the appointment order.

Regards, Nandkishor

Understanding CTC and Its Components

The term CTC is more confusing than clarifying. CTC is only the computed cost indicating the per-head expenses of the organization for its manpower. It includes not only the direct benefits that the employee receives every month but also the proportionate cost for indirect employee benefits such as transport, canteen, medical, township, social clubs, associations, etc. The employee doesn't receive these indirect benefits in hand, like the employer's share of PF or the annuity paid for gratuity, but they are accounted for.

Gratuity and Its Eligibility

The eligibility for gratuity is only after completion of the required length of service, and it is not paid before, as mentioned above. However, it is still an expense borne by the company and is factored into the calculation of CTC. Therefore, CTC is only an indicative figure, and what the employee actually receives as gross pay may differ.

First of all, let's understand the meaning of CTC - Cost to Company, which refers to the yearly expenditure that a company spends on an employee. The amount each employee spends depends on their salary and the variable package offered for the job.

Regarding Gratuity

Gratuity is a variable payout usually given after a certain period of service completion. If the required period is not fulfilled, no payment is made. It's important to note that this variable payout is not a specific percentage of an employee's Gross Salary but rather a fund created by the employer, either through establishment funds or an insurance policy.

Definition of Gratuity

The definition of Gratuity specifies it as a financial component provided by an employer to an employee in recognition of their service to an organization. This payment is made upon superannuation, retirement, resignation, or in the event of death after completing 5 years of service.

Thanks & Regards,
Sumit Kumar Saxena

Dear colleague, it is to be clearly understood that reckoning gratuity cost as a part of CTC is well justified. Companies are required to make financial provisions either by creating a fund for it or linking with an insurance company.

The justification and liability arise from the fact that it becomes payable to the employee's heir or nominees in case of his/her death after joining, irrespective of the length of service.

However, in case any employee gets separated before completing five years of eligible service, he is not eligible for it, notwithstanding gratuity being considered as a part of CTC.

Regards,
Vinayak Nagarkar HR and Employee Relations Consultant