Is Gratuity Part of CTC? Percentage Deduction from Salary

“Is gratuity part of CTC” is among the most frequently asked questions by government, private, or public sector employees. The simple answer to this question is; that gratuity is not part of CTC; both are separate employee payments.

Gratuity is paid apart from your monthly salary on completing at least 5 years of service in a company. Your Cost to Company (CTC) is calculated separately from your gratuity funds. Let’s have a detailed look at the topic!

You can check Online Gratuity Calculator UAE.

What does CTC Mean?

CTC is an acronym that stands for Cost to Company. The total compensation a company pays employees over one year is called the Cost to the Company.

The CTC amount is calculated by adding additional benefits to the employee’s total salary. We can say that CTC covers all the salary components, monetary and non-monetary amounts, as per the Indian Payroll System.

The gratuity amount is usually figured as a portion of the employee’s basic salary and might be part of the CTC as a perk for long-term employees.

What are the Basic Components of CTC?

Usually, the  total CTC amount is calculated based on the following components:

Direct Benefits

Direct benefits are paid to the employees every month with the salary. Direct benefits include the basic salary of an employee, including different allowances such as Medical, House Rent, Transportation, Leave & Travel (LTA), and Dearness allowance (DA).

Indirect Incentives

Employees receive these perks through the company, without any direct investment. The real monetary value of these expenses is added to the CTC amount. As the payment of these incentives is made indirectly, hence the term indirect benefits is given. These incentives may include Tax Savings, Loan Schemes, Life Insurance, Leased Accommodation, Company-sponsored food plans, etc.

End-of-Service Benefits

Includes provident fund and gratuity and these benefits are payable to the employee at the end of his contract.

Is Gratuity Considered Part of CTC in 2023? What is Gratuity Percentage in CTC?

As per Indian Employment rules, gratuity is a legal right of an employee and not a part of CTC; rather, it is calculated apart from the employee’s monthly pay. However, in 2000, some companies started adding it to the CTC package to improve their employee retention rate.

Also, including gratuity to CTC can’t be considered a violation of law, either legally or morally, if the employee has not made any financial contribution to his working organization.

The total gratuity is compulsory for Private Limited Companies in India registered under the Company Act. So, it is not included in CTC as the employees become eligible to get gratuity payment after completing 5 years of job in an organization, not from the beginning of the appointment.

For example, your hiring company deducts 4.81% of your salary as a gratuity fund to be paid at the end of his service tenure (at least 5 years). This annual deduction may be considered part of your CTC. However, you will not get a gratuity if you get terminated or resign from your job before completing 5 years of service. But you can get this deducted amount as back as an ex-gratia payment.

CTC Calculation Formula with Example

Cost to Company (CTC) = Total Basic Salary+ Additional benefits or allowances (medical insurance and PF percentage)

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		1,85000
Other Benefits	Medical Insurance	3500
	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?

The gratuity amount is deducted from an employee’s monthly salary (basic pay + additional allowances). Therefore, the gratuity sum depends on the monthly pay structure of an employee throughout his employment.

As per the Payment of Gratuity Act 1972, the gratuity is approximately 4.81% of basic pay. The simple formula for gratuity calculation in CTC is given below:

Gratuity amount= 15/26 * Last Basic Salary * Total Number of Service Years

However, if you want to calculate your end-of-service gratuity, you can estimate it from the gratuity calculator. It is a free and handy tool to assist employees in checking their estimated gratuity amount in a few seconds based on the total years of service, basic pay, and contract types.

Also read What is Gratuity in Salary.

Is Gratuity and CTC Taxable?

A person’s gratuity will be considered part of his pay, making it legally taxable. However, the government may grant tax exemptions on gratuities depending upon the total gratuity amount or other situations. According to the Provision of Income Tax Act 1961, certain allowances may be partially or fully exempt from tax. On the other hand, an employee’s CTC or monthly salary is taxable.

Does Gratuity Inclusion in CTC Mandatory in India?What the Law Say?

Cost to Company represents the total expense a company incurs for employing someone, not necessarily the exact salary disbursed to the employee. Gratuity, conversely, is computed based on an employee’s final drawn salary, usually comprising basic pay and DA.

In India, there’s no legal obligation to include gratuity in CTC. Many companies opt to incorporate gratuity into CTC to enhance the attractiveness of the compensation package. Nonetheless, if an employer deducts an amount labeled as gratuity from the salary, it can be reclaimed, albeit not as gratuity, even before five years of service completion.

Is Gratuity Considered Part of CTC in Accenture, TCS, and Cognizant?

If you’re an Indian employee, your gratuity amount will not be included in Cost to Company (CTC), whatever organization you work for. Even the top companies such as Cognizant, Accenture, and TCS don’t consider gratuity part of the Cost to the Company.

Does Inclusion of Gratuity in CTC Impact Employee’s Monthly Salary?

Yes, including gratuity in CTC affects an employee’s monthly salary as it’s part of the overall compensation package. However, the impact on the monthly take-home pay depends on how the employer structures the CTC.

While the gratuity amount is factored into the CTC, the actual payment is made upon meeting eligibility criteria, usually upon completion of a certain period of service. Therefore, while it influences the overall compensation, it doesn’t necessarily increase the monthly salary directly, but rather affects the total remuneration over time.

Bottom Line

The question “Is gratuity part of CTC?” is more than just a matter of accounting semantics, rather it’s about understanding the complexities of employment package. While gratuity inclusion in CTC impacts your overall compensation, it doesn’t necessarily mean a direct boost to your monthly paycheck. For any queries, feel free to contact us for a discussion. We’re available 24/7 to help you in solving your problems.