Gratuity in CTC: Is It Fair to Include It, or Should We Question Employers?

I am continuously coming across statements and discussions questioning why gratuity is included as part of CTC by many companies. I know it's a strategy to increase the overall CTC size. I need proper guidance on whether including gratuity in CTC is considered an offense, or should we question the employer about the reasons for doing so.

Hi, If gratuity is part of the gross salary, then it is incorrect. Any value shown outside of the gross is acceptable, and the employer simply wants to project the overall cost incurred by the company to the employee.

There is nothing wrong with depicting gratuity in CTC. Indeed, not only gratuity, but organizations also include indirect compensation items like per capita expenses on canteen subsidy, township, medical facility, membership of the social club, etc.

CTC is a non-statutory term, and every organization is free to include the items it is spending its money on.

Including gratuity as part of the Cost to Company (CTC) is a common practice in India and is not considered an offense. There are several reasons why employers include gratuity in the CTC:

Compliance with Gratuity Act

The Payment of Gratuity Act, 1972, is a statutory requirement in India that mandates employers to provide gratuity to employees who have completed five or more years of continuous service. By including gratuity in the CTC, employers ensure compliance with this legal obligation.

Transparency

Including gratuity in the CTC provides transparency to employees about the total compensation they are eligible to receive, including both fixed and variable components.

Attracting and Retaining Talent

A higher CTC, which includes gratuity, can be more appealing to potential employees and serve as a retention tool to encourage employees to stay with the organization for the long term.

Budgeting and Financial Planning

Including gratuity in the CTC helps employers budget for future gratuity payments and ensures they have sufficient funds to meet these obligations.

Accounting and Taxation

Including gratuity in the CTC streamlines the accounting and taxation process for employers, as they can plan for and account for gratuity expenses as part of the overall CTC.

It is important to note that including gratuity in the CTC does not mean that the gratuity amount is paid to the employee immediately or along with the regular monthly salary. Gratuity is a retirement benefit, and the payment is made when an employee completes five years of continuous service with the organization or upon retirement, resignation, or death.

However, it is crucial for employers to clearly communicate to employees the components of their CTC, including the gratuity component. Employers should also ensure that they comply with the rules and regulations regarding the payment and calculation of gratuity as per the Payment of Gratuity Act, 1972.

If an employer fails to pay gratuity as per the provisions of the Act, it can attract legal consequences, and the employee can approach the appropriate authority or labor court to claim their gratuity dues.

Inclusion of Gratuity in CTC

Inclusion of Gratuity in CTC is not an offense by the employer. Rather, it is a recruitment and selection strategy by the employer. Apart from the monthly salary, an employer needs to spend money on employees' amenities, perks, allowances, social security, etc., which is also a cost to the company (CTC).

Thus, the employer may record all the heads for which the company needs to pay and generate a CTC sheet, which shall be attached to the final Offer of Appointment made to an employee.

It is not an offense as long as it is shown outside the gross salary and no amount is deducted from the gross salary by way of gratuity. However, showing it in the CTC, which itself is not a statutory term, is just to inflate the remuneration. Not only that, it is not a realistic figure. Everyone shows gratuity per year, but the actual cost by way of gratuity should take into account the length of service as well. Therefore, it is just an imaginary figure. It is good if you avoid it; I will not say you should not include it.

Benefits as Part of CTC

There can be any benefit provided by the employer as a part of CTC. So, there is no offense according to me. But at the same time, the benefit must be delivered.

Gratuity and Its Implications

In the case of gratuity, it's applicable after the completion of five years of continuous service in an organization. However, a lot of employers make a mistake. After including it in the CTC, it is mandatory to book it in the account, and they have to pay it when an employee resigns or leaves the organization without completing their five years of duty because the booked amount is a liability that they have to settle.

It is a common practice that gratuity is included as a part of the CTC of an employee when they are hired. Gratuity is one of the social legislations in the country, passed in 1972. It is a benefit to be provided to the employee at the time of separation upon meeting certain conditions as stipulated in the Act.

Payment of Gratuity Act, 1972

As per Sec. 4A of the Payment of Gratuity Act, 1972, every employer shall, subject to the provisions of subsection (2), obtain insurance in the manner prescribed for their liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India or any other prescribed insurer. Whoever contravenes the provisions shall be liable for punishment.

Further, the employer shall calculate the actuarial value of the liability every year with the increase in their salary year on year and make additional premium to the insurance company. This incurs a cost for each employee even though the employee will be eligible for payment of gratuity only on completion of five continuous years of service in the organization (in the case of death, the condition of completion of five years of continuous service is not required).

Including Gratuity in CTC

Hence, it is appropriate for any employer to include the value of gratuity in the CTC since it is a clear cost to the company. Additionally, it helps the employer to compute the manpower cost for budgeting, product price fixation, compensation, and benefit administration, etc.

Regards,
Ranganathan R S
Chennai

Thank you all. I agree that it is not offensive but a strategy to increase the size of CTC. However, Gratuity becomes payable after 5 years, so why show Gratuity in the offer letter or in CTC from day one? It is meaningless and unethical.

Any person has to work for 5 years or 4.8 months to be eligible for Gratuity.

It should be reflected after 5 years of service because it becomes a liability for the employer to pay only after 5 years of service.

Hi, Employers want to project the total cost incurred for the employee, including the Gratuity premium. Nowadays, most employers pay a premium to the insurance company under a Group Gratuity scheme. The employer has to pay the premium compulsorily, irrespective of whether the employee is going to complete 5 years or not. If the employee completes 5 years, the insurance company will release the Gratuity payment. Alternatively, if the employee leaves the company in 2-3 years, whatever premium paid by the employer will go to the insurance company only; neither the company nor the employee can claim it back. As it involves a cost factor, Gratuity is projected in the CTC.

The premium paid in respect of employees who leave without qualifying for gratuity will not go to the insurance company, but it will be adjusted against the insurance premium payable for the next period.

Issue with Gratuity Portion

The issue is not with respect to the premium, but the gratuity portion shown is just a figure for the particular year based on the salary qualifying for gratuity for that year, and it does not consider the length of service.

Understanding Gratuity in CTC

The premium amount need not be exactly 4.8 percent of your salary, but it is based on certain calculations derived from actuarial valuation, which, in turn, is based on various parameters. This calculation is conducted annually. The 4.8% represents 15 days' salary for one year, and this amount is allocated as gratuity in the CTC statements.

Actually, in my opinion, the exact premium towards gratuity should be shown in CTC, which is payable and which is actual. We are HR; hence, we do put gratuity in CTC. But when you are offered, and gratuity affects your CTC, then the real question arises, "Why is gratuity included in salary?"

Anyways, thank you very much for your active participation on this topic.