Is Gratuity Part of CTC? Percentage Deduction from Salary
For any employee (or job-seeker) in India, it is imperative to know what is gratuity and how it’s related to CTC (Cost To Company). Many professionals get confused when they spot the attractive concept of gratuity right in their CTC, but don’t see any concession in their monthly pay. This detailed article will explain: what is CTC, what is gratuity, whether gratuity is included in your salary, tax benefit and how top IT firms like Accenture, TCS and Cognizant deal with gratuity.
What does CTC Mean?
CTC stands for Cost to Company. The remuneration with all benefits thus calculated over one year is known as the Cost to the Company or CTC.
The CTC is computed by including some more benefits with the total salary of the employee. we can call it as CTC is nothing but It covers all the salary components (Only cash and non-cash payment) under Indian Payroll.
The gratuity amount is typically calculated as a percentage of the basic salary of the employee and can come in CTC as one of the benefits extended to employees who continue with the organization for long tenure.
What are the Basic Components of CTC?
Generally, the cumulative CTC is derived from the following heads:
Direct Benefits
Benefits are issued monthly in the salary to the staff. It consists of basic salary (which varies from job to job and company to company), and other allowances, which depend on the employee’s rank, city of residence, etc. Other benefits, such as medical, house rent allowance (HRA), leave travel allowance (LTA), and dearness allowance (DA) are also part of the pay slip.
Indirect Incentives
All of these benefits come through the employer, with no personal contribution required. The actual dollar value of these costs gets included in the CTC total. Because the payment of these incentives is not direct, it is called as Indirect Benefits. These benefits can be, Tax Saving, Loans, Life Insurance, Leased Accommodation, Company paid food, etc.
End-of-Service Benefits
Covers provident fund & gratuity and the same is payable to the employee on termination of his contract.
Is Gratuity included in CTC In 2023? What is Gratuity Percentage in CTC?
In accordance with India’s Employment Act, gratuity is an employee’s statutory entitlement and is not included in CTC, it is not a component of an employee’s salary but is instead calculated over and above the monthly salary. Beginning in 2000, however, some employers included it in the CTC package as an incentive for their employees to stay.
Adding gratuity to CTC also cannot be a breach of law, because the employee has not contributed anything!
The full gratuity is mandatory for India’s Private Limited Companies under the Company Act. Hence, it is not part of CTC, as employee is eligible for the gratuity pay out after 5 years of service in an organization and not from the date of joining.
e.g. Your recruitment company still deducts 4.81% as a gratuity fund upon completion of his contract (no less than 5 years). This annual deduction can be seen as a part of your CTC. But if you’re fired or resign from your job without completing 5 years of service you won’t receive a gratuity. But you can receive this deducted amount back as an ex-gratia payment.
CTC Calculation Formula with Example
| Salary Components | Type of Incentive in Salary Package | Payment |
|---|---|---|
| Basic Salary | – | 100,000 |
| Allowances | House Rent | 35,000 |
| Medical | 10,000 | |
| Dearness | 30,000 | |
| Conveyance | 10,000 | |
| Gross Pay | 185,000 | |
| Other Benefits | Medical Insurance | 3,500 |
| Provident Fund (12% of basic pay) | 12,000 | |
| Total Benefits | 15,500 | |
| Total CTC Amount | 200,500 |
Gratuity Deduction from Salary: Is it deducted from Monthly Pay?
An employee’s sum insured gets reduced by the amount of gratuity, which is payable to him / her, at the time of incurring a claim and is based on the monthly salary (basic + DA + additional allowances). So, the gratuity amount is based on the employees monthly pay during his tenure.
The gratuity (payment) is about 4.81% of basic pay. The KISS (keep it simple stupid) formula for calculation of gratuity in CTC would be as under:
Amount of gratuity = 15/26 Last Basic Salary No of years of Service render. Incase you do wish to calculate your End of Service Gratuity, you can estimate it using the Gratuity Calculator. It is a free utility service to help employees quickly find out their approximate estimated gratuity amount in seconds by entering the total years of service, basic pay, and contract details.
Is Gratuity and CTC Taxable?
A man’s tip will not be his own profit, but such others’ as common laws allow in this behalf, for it will be as if he worked with them; and therefore such his gratuity will fall within the legal tax. However, the government could provide tax relief on gratuities based on the overall gratuity amount and other circumstances. There are few allowances which are exempt from tax full or part as per Income Tax Act 1961. So, contrastingly, an employee (s) CTC (or) Monthly Salary is taxable.
Is Gratuity Part of CTC Compulsory in India? What the Law Say?
Note, ‘cost to company’ (CTC) refers to total cost for hiring an employee to a company, not the actual amount given to employee as a salary. On the other hand, gratuity is calculated on the employee’s last drawn salary that normally include basic pay and DA.
Gratuity is not mandatory to be added in the CTC in India. To make the CTC more attractive, a lot of companies choose to add gratuity in CTC. But if an employer is cutting an amount called as gratuity from the salary, even then the payable can be recovered, not in the form of gratuity, even before completion of five years of service.
Is Gratuity Included in CTC in Accenture, TCS, and Cognizant?
If you happen to be an Indian employee, the gratuity amount would be excluded from the calculation of Cost to Company (CTC) for any employer you’re dealing with. Gratuity is not considered as part of the Cost to the Company even by the Top companies including – Cognizant, Accenture, TCS.
How Does CTC Affect Your Monthly Pay If It Includes Gratuity?
Yes, any gratuity in CTC will impact the monthly salary of an employee as CTC is the total compensation package. But how the CTC is structured by the employer makes a difference in the monthly take-home pay.
Though the gratuity is taken into account in the CTC, the actual payment is done when certain conditions are met, typically when an employee completes a certain tenure in service. So while it does affect the whole compensation, it is not that it more or less directly augments the monthly salary, as such has a deep impact on the total retribution over the duration.
