Gratuity in CTC: How Do You Handle It for Employees with Different Service Years?

Gratuity in CTC for Employees

1. What is the gratuity amount we can include in the CTC for those who have completed their 5 years of service and for those who have not yet completed 5 years of service?

2. Is it necessary to deposit the gratuity amount to any trust, or can the amount remain with the employer?

3. Does the gratuity amount appear in the payslip?

4. When is the company eligible to show the gratuity amount as an expense in the Profit & Loss account?

5. What are the pros and cons of incorporating gratuity into the CTC?

Understanding Gratuity in CTC

1. The gratuity amount included in the CTC varies as per the terms of the employer. For employees who have completed 5 years of service, the gratuity amount is typically calculated as (15/26) x Last drawn salary (basic salary + dearness allowance) x number of completed years of service. For employees who have not yet completed 5 years, the gratuity amount is usually decided by the employer's policy.

2. As per the Payment of Gratuity Act, 1972, if an organization has more than 10 employees, it is mandatory to form a gratuity trust and the amount needs to be deposited into the trust. However, if the company has less than 10 employees, the gratuity amount can remain with the employer.

3. The gratuity amount is usually not included in the payslip. It is a part of the CTC (Cost to Company) but not a part of the monthly gross salary.

4. The company can show the gratuity amount as an expense in the P&L account when the employee has completed 5 years of service and is eligible for gratuity.

5. Incorporating gratuity into the CTC has both pros and cons. The advantage is that it increases the total CTC, which might seem attractive to the employees. The disadvantage is that the gratuity amount is only payable on completion of 5 years of service, so it does not benefit the employee in the short term. Moreover, it can create confusion as employees might consider it as a part of their take-home salary, while actually, it is not.