Understanding Gratuity in CTC: Is Annual Payout Possible or Just a Tax Benefit for Employers?

Hi all,

Firstly: As I understand, there is no employee contribution towards gratuity; only the employer contributes, correct?

Secondly: If Gratuity is shown as part of CTC, then notwithstanding the fact that it cannot be drawn before 5 years as per the Act, is the company liable to pay it annually? You see, if it cannot be drawn annually, then in this case, the major benefit is solely to the employer for tax relief, as the employee has to then stick for 5 years before he can ask for it.

Kindly clarify both points.

Regards,
Brandon

There is no employee's contribution to gratuity. Gratuity is not a contribution fund like the Employees Provident Fund. Showing the gratuity as part of CTC is a new trend, but it cannot be paid monthly or annually. It becomes payable only when an employee leaves after serving for at least 5 years. No employer can say in advance that a particular employee will serve for 5 years. Therefore, the gratuity accrues only after 5 years.

Regards, Madhu.T.K

Thanks for the clarification. Also, I understand that gratuity is not taxable in any case, even if it is shown as a component of CTC. Is that correct?

Regards,
Brandon

Hi Madhu,

I agree with you that gratuity is paid after 5 years of continuous service in one company, making the employee eligible for gratuity. However, if it is included in the CTC (Cost to Company) part, then the employer has to pay gratuity when the employee leaves the organization, even if the employee has not completed 5 years of service.

Regards, Nimish Joshi 9969526325

Dear Nimish,

Even if the gratuity is shown as part of CTC, the employee will not receive it if he leaves before 5 years of continuous service. The qualifying phrase 'continuous service' will not be applicable if the employee dies, and in such a case, the employer has to pay gratuity to the nominee even if the deceased employee had not completed 5 years of service.

Regards,
Madhu.T.K

Dear Madhu,

Can we pay gratuity in a monthly allowance as a "Special Allowance"? Please clear my doubt.

dsv

Please review the revised text below:

"Please clarify, is gratuity deducted from CTC? If I leave my organization within 1 or 2 years, am I entitled to get back my money as I have not completed 5 years? - Rajeev"

Dear All,

Few Clarifications:

1. Gratuity is shown in CTC because the company wants to realize its additional cost towards the employee, in case he completes 5 years.

2. Gratuity is also shown in CTC to increase CTC figures on papers to fight competition. For example, a few companies also show the cost of trainings in CTC that the employee would be receiving year on year.

3. Gratuity is a compulsory contribution from the employer's pocket and by no means, an employee can pay it.

4. Gratuity cannot be shown in "Pay Slip".

5. Gratuity can be claimed only if an employee completes 5 years of service without breaks.

6. Gratuity cannot be shown under the head of any other allowance.

Dear DSV,

Special Allowance, referred to as Spl Allowance, is calculated in the CTC scale as follows:
Spl Allowance = CTC - (Basic + HRA + all allowances).
The remaining balance is then classified as a Special Allowance.

Gratuity eligibility is set at 5 years, and under this circumstance, there is no provision to pay gratuity as a special allowance.

Dear All,

Thanks for the valuable information. I have two queries:

1. With whom is the amount of gratuity contributed by the employer kept/deposited?
2. What happens to the amount of gratuity accumulated in the case of an employee who leaves the organization before completing 5 years?

Swati

Mr. Madhu,

Recently, I came to know about a Supreme Court ruling which states that an employee is eligible for gratuity if they have completed four years of continuous service and 240 days of continuous working in the fifth year.

Now, my question is: have you ever come across such a ruling? If yes, could you please look out for the ruling?

Dear Nimish,

Even if gratuity is shown as part of the Cost To Company (CTC), the employee will not receive it if they leave before completing five years of continuous service. The term 'continuous service' does not apply if the employee passes away. In such a case, the employer is obligated to pay gratuity to the nominee, even if the deceased employee had not completed five years of service.

Regards,
Madhu.T.K

By including gratuity in the Cost to Company (CTC) by the employer, it does not become mandatorily payable by the employer, since he is doing an act which is not supported by the Gratuity Act. Therefore, it is ultra vires to the act and cannot be done.

Saikat
9433144589

I have 2 questions:
1. With whom is the amount of gratuity contributed by the employee kept/deposited?
2. What is done with the amount of gratuity accumulated (employee CTC contribution) in the case of an employee who leaves the organization before completing 5 years?

Thanks & Regards,
Santu.

Gratuity is shown as a component in CTC designing. However, we do not deduct it from your salary. I think you've misunderstood the Gratuity and its inclusion in CTC. There's a post below your post that explains why employers put Gratuity in CTC. Hope that clarifies the doubt.

Also, understand that Gratuity is not an allowance or bonus that we can split and give to employees on some occasion. Gratuity is the amount given by the employer as a token of appreciation for long tenure and service (a minimum of 5 years). Gratuity is not a matter of right if you have not completed 5 years. For more information, read <i>&lt;link no longer exists - removed&gt;</i>.

Regards

Dear Madhu,

Questions on Gratuity Management

I have two questions:

1. Where is the Employee's Gratuity Contribution Kept?

Since gratuity is a guaranteed payment if the employee leaves after 5 years, a few companies deposit it with LIC or related firms. Many others just have a different account managing their gratuity surplus.

2. Handling Gratuity for Employees Leaving Before 5 Years

What is done with the amount of gratuity accumulated (employee CTC contribution) in the case of an employee who leaves the organization before completing 5 years? If there are no claimants, the gratuity surplus continues to grow in the company's kitty. The contribution is made every year depending on the salary you draw in that year. However, you would be paid based on the last drawn salary (which will be higher than the salary you once drew and hence contribution once made). The surplus is used to adjust such addition. The whole amount of the gratuity of non-claimants (employees who leave before tenure) is in the company's kitty (as far as my knowledge goes).

Hope this solves your query.

Thanks & Regards,
Santu.

Hi Bradon,

First of all, Gratuity is not contributory. It would be paid to those employees who have served the company for at least 5 years. So there is no employees' contribution.

Secondly, most companies keep provisions for Gratuity, which is why they add the Gratuity amount to CTC. Some companies take out policies for Gratuity from LIC or other insurance companies and pay the annual premium, so they include the amount in CTC.

AMATYA

Hi Friends,

What happens if an employee dies after one year of service? Please let me know the procedures in the following scenarios:

1) Death on duty, i.e., due to an accident.
2) Natural Death.

Regards,
Amith R.

Hi Bradon,

First of all, Gratuity is not contributory. It would be paid to those employees who have served the company for at least 5 years. So there is no employees' contribution.

Secondly, most companies keep the provision for Gratuity; that's why they add the Gratuity amount to CTC. Some companies take out a policy for Gratuity from LIC or other insurance companies and pay the annual premium, so they include the amount in CTC.

AMATYA

Hi AMATYA,

Thanks for the clarification. Also, if the company is showing it as part of CTC, does it mean that it will be considered for taxation purposes like the other components? I don't think so; however, kindly clarify my doubt.

Regarding the query by Amitha, I think that it is payable even before the completion of 5 years in the case of death (anyhow).

Regards, Brandon.

How can we claim gratuity before 5 years if it's part of our CTC?