When applying for a job, you receive a job offer which includes your Cost to Company (CTC) figure, this is the total amount of money the company will spend on you annually. It is a very common way for the company to estimate and provide you with a total compensation package. Now, one of the components included in your CTC is gratuity. A gratuity is a sum of money that an employer pays to an employee as a reward for working with the company for a certain number of years. But what exactly is gratuity, and how is it calculated in the CTC? Let’s dive in and explore.
What Is Gratuity?
Gratuity is a lump sum payment made to an employee when they leave the company after working there for a certain period, typically five years or more. This payment is provided as a gesture of appreciation for the services rendered by the employee. It is governed by the Payment of Gratuity Act, 1972, which mandates gratuity payments for employees in firms with more than 10 employees.
How Is Gratuity Calculated?
The amount of gratuity you receive depends on your last drawn salary and the number of years you have worked at the company. The formula used to calculate gratuity is:
Gratuity Formula:
Gratuity = (Last drawn salary × Years of service × 15) / 26
Let’s break down the terms in the formula:
- Last drawn salary: This is your basic salary plus any dearness allowance (DA).
- Years of service: This refers to the total number of years you’ve worked at the company.
- 15: This represents the number of days of salary you are entitled to for every year worked.
- 26: This is the standard number of working days in a month.
Example of Gratuity Calculation:
If your last drawn salary is ₹50,000, and you’ve worked at the company for 10 years, the calculation would look like this:
Gratuity = (50,000 × 10 × 15) / 26
Gratuity = ₹288,461.53
So, in this case, the employee would receive ₹288,461.53 as gratuity after 10 years of service.
Gratuity in Your CTC
In your Cost to Company (CTC), gratuity is shown as part of the total compensation package. However, it is important to note that while gratuity is included in your CTC, it’s not something you receive immediately. Gratuity is accumulated over time and only paid out when you leave the company, typically after completing at least five years of continuous service.
Even though it’s part of your CTC, gratuity is a long-term benefit and is not something you can access on a monthly basis like your regular salary or bonuses.
Gratuity vs. Other CTC Components
Gratuity differs from other components in your CTC because it’s a one-time benefit you will receive when you leave the company. Let’s compare gratuity with other components:
| Component | Paid Regularly? | Available Right Away? | Purpose |
|---|---|---|---|
| Salary (Basic + HRA) | Monthly | Yes | To cover regular living expenses |
| Bonuses | Annual/Quarterly | Yes (if applicable) | Performance-based rewards |
| Gratuity | Once upon leaving | No | Long-term appreciation for service |
Is Gratuity Taxable?
Gratuity is tax-exempt up to a certain limit under the Income Tax Act, 1961. Here’s how the tax exemption works:
- For government employees: Gratuity is completely tax-free.
- For non-government employees: Gratuity is tax-free up to ₹20 lakh under section 10(10) of the Income Tax Act.
Tax on Gratuity:
- Taxable gratuity: If you receive gratuity beyond the exempted limit, it will be taxed as per applicable income tax slabs.
Conclusion
Gratuity is an important part of an employee’s CTC, but it’s a benefit that’s paid out after a certain period, usually when you leave the company. It is calculated based on your salary and years of service. While it may be part of your CTC, it is not something you will receive regularly but rather as a lump sum once you retire, resign, or leave the company after meeting the required tenure.
Common Questions About Gratuity
1. What is included in the last drawn salary for gratuity calculation?
The last drawn salary refers to the basic salary and dearness allowance (DA). Other allowances or bonuses are generally not considered in the calculation.
2. Can I receive gratuity if I leave the company before completing 5 years?
No, you must complete at least 5 years of service with the company to be eligible for gratuity.
3. Is gratuity taxable?
Gratuity is tax-free up to ₹20 lakh for non-government employees. For government employees, gratuity is fully exempt from tax.
4. Is gratuity the same as my monthly salary?
No, gratuity is a lump-sum amount that is paid when you leave the company after meeting the required years of service. It is not part of your monthly salary.
5. Can my family claim my gratuity if I pass away before retirement?
Yes, if an employee passes away, their family members or nominee can claim gratuity, even if the employee has not completed 5 years of service.
This simplified guide should give you a clearer understanding of how gratuity works as part of your overall CTC.Attach
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