Gratuity on CTC: Do You Need to Pay It After Just One Year of Employment?

Gratuity on Cost-to-Company (CTC)
Does gratuity on CTC need to be paid even after one year of completion?

Dear Lourdhu,

The Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972, is the complete code on the subject matter of gratuity. Once an establishment comes within the purview of the Act, the process of payment of gratuity must be done according to the provisions of the Act only.

Section 4(5) and Better Terms of Gratuity

At the same time, section 4(5) of the Act permits better terms of gratuity as per any award or agreement. Without adhering to the minimum qualifying service of not less than 5 years of continuous service as per section 4(1) of the Act, paying gratuity to fixed-term contract employees proportionate to the actual length of completed years of continuous service rendered is a statutory concession granted under the existing Standing Orders Rules, 1946, as well as under section 53(1) of the yet to be enforced Code on Social Security, 2020. This is to be necessarily read together only so as to distinguish the legal status of CTC, which is not more than a statement of projection of the overall annual cost per employee from the employer's perspective.

Therefore, there is no necessity to pay gratuity to an employee who leaves the establishment without completing the statutory minimum qualifying service just because CTC mentions the head of gratuity expense.

Dear Lourdhu, Legally, no, but morally, yes. Gratuity is typically paid after five years of continuous service, as per the Payment of Gratuity Act, 1972. However, some companies may choose to include gratuity in the CTC and pay it earlier as a goodwill gesture. It's important to check your company's specific policy on this matter.