How to include Gratuity in Employees CTC

This query is : Resolved

Rahul Shelke (Querist)
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19 January 2011 Dear Experts,

Our company is planning to implement LIC's group gratuity scheme. As it will be affect the employee cost, the management is thinking to include the gratuity component in employees CTC (since it will be added benefit to the employee).

Now my queries are as follows:
- Is the management's decision of including gratuity in CTC is legally correct?

- How to include gratuity in CTC? i.e. at what %age?

- If after including gratuity component in employees CTC, any employee leaves the company before completing 5 years of continues service then he will not be eligible for gratuity claim. Then in that case how to compensate the employee for the gratuity portion deducted from his salary over the period of his employment with the company?

Thank you.

Best Regards,
- Rahul

Sunil Kr. Sanganeria

Sunil Kr. Sanganeria (Expert)
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19 January 2011 Nowhere in the law, it has been mentioned that gratuity can not include in CTC.

Generally Emplyer should not include Gratuity in CTC as gratuity is payable to emplyee only after 5 years of service. If any employee leaves before, he is not entitled for gratity.

But now-a days many emplyer include gratuity in CTc as employer has to pay every year to LIC towards gratity of employee. Amount to be paid is calculated on the basis of Acturial Valuation done by LIC.

Rahul Shelke

Rahul Shelke (Querist)
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19 January 2011 Dear Sir,

Thanks for your reply.

But I think it's difficult to get the acturial valuation for each new employee at the time up of his joining the company. In such a case can we use any formula. For eg. a fix % age on basic salary or like that.

As you mentioned that if a employee left the organization before completing 5 years of continues service, then how to compensate the amount shown as part of employees CTC and never paid to him as he left the company before completing 5 years.

Thank you.
- Rahul

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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28 July 2024 Including gratuity in the Cost to Company (CTC) of employees can be a strategic move for many organizations, as it reflects the total cost of employment and can serve as an attractive component of the overall compensation package. Here’s how you can handle this:

### **1. Legal Correctness of Including Gratuity in CTC**

- **Legality:** It is legally permissible to include gratuity in CTC. The Gratuity Act, 1972, mandates payment of gratuity to employees who have completed five years of continuous service. Including gratuity in CTC is a common practice and provides employees with a clear view of their total compensation package.

### **2. How to Include Gratuity in CTC**

#### **A. Determining the Gratuity Amount**

1. **Gratuity Calculation Formula:**
- Gratuity is calculated as:
**Gratuity = (15/26) × Last Drawn Salary × Number of Years of Service**
- **15/26** is the formula used for calculating gratuity under the Payment of Gratuity Act, 1972.

2. **Including Gratuity in CTC:**
- **Percentage of Basic Salary:** You can approximate gratuity as a percentage of the basic salary. Typically, this is around 4.81% of the basic salary.
- For example, if an employee’s basic salary is ₹50K, then the annual gratuity would be approximately:
= ₹2,405 per month**
- **Alternative Calculation:** You can use an actuarial valuation if available, but for simplicity, using a fixed percentage of the basic salary is common practice.

#### **B. Example Calculation:**

- **Assumptions:**
- Basic Salary = ₹50K per month
- Gratuity Rate = 4.81%

- **Monthly Gratuity Component:**

= ₹2,405

- **Annual Gratuity Component:**

= ₹28,860

- **Including in CTC:**
- CTC = Basic Salary + Gratuity Component + Other Benefits

### **3. Handling Early Departure of Employees**

- **Compensation for Early Departure:**
- If an employee leaves before completing five years of continuous service, they are not eligible for gratuity. To handle this:
- **Inform Employees:** Clearly communicate that gratuity is a part of CTC but is payable only after completing the required service period.
- **Adjustment in Final Settlement:** If the employee leaves before five years, ensure that the gratuity component is adjusted in the final settlement.
- For instance, if an employee leaves after two years, the gratuity amount deducted for the remaining years should not be paid out, but it should be noted that it was included in CTC.

- **Documentation and Policy:**
- **Documentation:** Ensure that this policy is documented and communicated to all employees clearly, so there are no misunderstandings about gratuity and its eligibility.
- **Policy:** Implement a policy that defines how the gratuity component is handled if an employee leaves before completing five years.

### **4. Actuarial Valuation and Practical Approach**

- **Actuarial Valuation:** While actuarial valuation provides a precise estimate, it can be complex and costly. For simplicity, using a fixed percentage based on basic salary is practical for many organizations.

- **Practical Formula:**
- Use a fixed percentage of the basic salary (e.g., 4.81%) to include in the CTC, as it simplifies administration and is acceptable for most payroll calculations.

### **5. Summary**

- **Inclusion in CTC:** Gratuity can be included in CTC, and it is legally correct to do so.
- **Percentage for CTC:** Typically, 4.81% of the basic salary is used.
- **Handling Early Departure:** Clearly communicate the policy and adjust the final settlement if the employee leaves before five years.

By implementing these practices, you ensure that the gratuity component in CTC is handled transparently and fairly, and that employees are aware of how it impacts their compensation.