Gratuity in CTC: Should It Be Monthly or Paid at Employment End? Let's Discuss!

How should gratuity be incorporated into the CTC?

Should it be provided on a monthly basis, and how should it be calculated? Additionally, when should gratuity be paid if the employee is still with the company?

Understanding Gratuity in Compensation Packages

Gratuity is an important component of an employee's compensation package. It is typically calculated as a percentage of the employee's basic salary and is paid as a lump sum amount upon meeting certain conditions, such as the completion of a minimum number of years of service.

Incorporating Gratuity into the CTC

In terms of incorporating gratuity into the CTC, it is common practice to include it as part of the overall compensation package but not to pay it out on a monthly basis. Instead, it is accrued over the years of service and paid out in full upon the employee leaving the organization, provided they meet the eligibility criteria. This helps in ensuring that employees are incentivized to stay with the company for the long term and also serves as a form of financial security for them post-employment.

Understanding Gratuity Payment

Please browse through the Payment of Gratuity Act; it should clear most of your queries.

Gratuity is incorporated as 4.81% of the basic salary of an employee. Why would you "provide gratuity on a monthly basis?" and why will you "pay gratuity when the employee is still with the company?" It is paid when an employee renders services for more than 5 years and is calculated with the following formula: 15/26 * Basic * Years of Service.

Gratuity as Part of Remuneration or Cost to Company (CTC)

By showing gratuity as part of remuneration or Cost to Company (CTC), you are agreeing that even if the employee leaves before five years, they will receive gratuity. Moreover, gratuity is calculated based on the salary at the time of leaving the service and the length of service. It is not possible to predict what the salary will be or how long the employee will serve with you. Therefore, by including an amount for gratuity, you are indirectly indicating that the mentioned amount is payable even if the employee does not work for the qualifying period of five years. While the majority of private companies include gratuity as part of CTC, I would not recommend it due to the factors mentioned above.

Accounting for Gratuity

Gratuity is not provided in the books every month; however, as per Accounting Standards, you must account for it annually in the books. If your establishment is in Andhra Pradesh or Karnataka, it is necessary to invest an amount equal to the sum required for gratuity payment as determined by actuarial valuation in LIC's Gratuity policies.

Gratuity as Part of CTC

Gratuity may be considered as a part of CTC. To date, there is no legal definition of CTC. Therefore, the question does not arise for any case law or legal interpretation.

If gratuity is a part of CTC, that does not mean it must be paid even if the employee has not completed 5 years of continuous service as per the Payment of Gratuity Act. There are many items that are part of CTC but are not necessarily required to be paid without fulfilling the basic conditions of payment, such as Statutory Bonus, LTA/LTC, etc.

Regards, S K Bandyopadhyay (Howrah, WB) CEO - USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons]

Hi, If gratuity is part of the gross salary, then it will be incorrect.

Gratuity as Part of CTC

It is customary for many companies to show the premium paid to the insurance company (for Group Gratuity scheme) as part of the CTC, and there is no obligation on the part of the employer to pay gratuity if the employee leaves before completing 5 years.

There is no court verdict in support of my observations about the inclusion of gratuity as part of CTC or remuneration sheet, I believe. In the absence of any legal sanctity to the word CTC, it shall mean all costs in connection with the employment of a person or from the employees' side all benefits that employees are entitled to in return for the service they offer to the organization.

The remuneration shall be split up into three parts as follows:

(1) Fixed and quantifiable amounts which will be mentioned in the offer/contract of employment.

(2) Variable allowances, the payment of which is based on some conditions, like overtime allowance which is dependent on the employee working over and above the scheduled hours, bonus the rate of which is again dependent upon the profitability/available surplus, commission/incentives which are based on some results achieved by the employee, say, sales target, production target, etc., house rent allowance which is per se a compensatory allowance dependent on the employee residing in a leased house, and is not paid to those who reside in their own houses or whose spouses are in receipt of HRA. But many private companies have included this component as one of the major components of salary without reference to whether they reside in leased houses or not, on the presumption that HRA is an allowance excluded from the scope of wages for PF, Gratuity, etc.

(3) Other benefits that the employees enjoy, like subsidized food, concessional rates of essentials, transportation/cab facilities, employer contribution to PF, gratuity payable at the time of termination of employment, leave travel concession, etc.

If the rewards for service are designed in such a way that there is specific categorization as to what is salary or what all are included in the wages/salary, and what all are variables and other benefits, there would be no confusion in the computation of gratuity. When there is no dispute that part one components are wages which will be considered for all statutory matters, I am afraid why the private companies include HRA in the First Part of the Salary? When the amount of HRA is fixed and not varying depending on the city of posting and when it is paid without reference to whether the employee is residing in a leased house or not or whether his spouse is in receipt of HRA, it shall be part of the salary only. Then it shall also be included for the computation of gratuity. This is going to be a challenge, I believe.

Understanding Gratuity in CTC

Gratuity, as you know, is an employee benefit payable to the leaving employee who has completed 5 years of continuous service. It's not payable either monthly or annually. However, since it's a charge accruing every completed year of service, it has to be accounted for every financial year.

Hence, it is a 'cost to the company' to be counted among CTC 'as such.' The need to pay arises only when an employee leaves the establishment, and that too only in respect of those completing 5 years of continuous service as per the Gratuity Act. Therefore, there is no requirement whatsoever either to pay or to account for the 'liability' on a monthly basis.

Although the liability 'to pay' arises only after the completion of 5 years in respect of every such employee, the accounting thereof as an 'expense' by way of a provision in the accounts arises 'annually.'

To my understanding, despite there being no court verdict, Mr. Madhu's opinion could turn out to be an oracle. It is very likely that a Constitutional Court could hold, in situations where gratuity is part of CTC, that employees are entitled to gratuity irrespective of the completion of the eligible period of service.

Objective of Providing Gratuity Annually

The objective of providing for gratuity on a yearly basis is to manage the funds whenever there is a need for payment of gratuity without affecting the working capital. That is why an actuarial valuation is made to assess the probable liability. The valuation considers the age of the employees in particular. Since the employer is liable to pay gratuity if the employee dies without reference to his service or whether the deceased had completed five years or not, provision for gratuity is always justified.

As already pointed out and endorsed by Mr. P Venu, the concept of CTC being a measure to lure the employees is going to become a two-sided weapon, one of which will pierce the employer.