Is Gratuity Part of CTC? Salary Percentage Deduction
Gratuity is often included as part of the Cost to Company (CTC) package offered by employers. It is a statutory benefit provided to employees as a token of appreciation for their years of service, governed by the Payment of Gratuity Act, 1972 in UAE. However, it is important to note that gratuity is not deducted from an employee’s monthly salary.
Instead, it is an amount that the employer sets aside as part of their liability and pays out when the employee leaves the organization, provided they have completed at least five years of continuous service.
The usual calculation for gratuity is based on the formula: (15/26) × Last Drawn Salary × Number of Years of Service, where the last drawn salary includes basic and dearness allowance. While the exact percentage allotted for gratuity in CTC may vary depending on the company, it typically forms a small fraction and does not directly affect the in-hand salary received by the employee each month.
What does CTC Mean?
CTC, or Cost to Company, refers to the total amount an organization spends on an employee in a year. It is the comprehensive package that includes not only the employee’s in-hand salary but also various benefits, allowances, bonuses, and contributions made by the employer toward schemes like Provident Fund or Gratuity. However, it is important to note that CTC is not equivalent to the take-home salary. Deductions such as income tax, professional tax, and other contributions are subtracted from the package, resulting in the actual salary credited to the employee’s account.
What Are the Basic Components of CTC?
The Cost to Company (CTC) represents the total expense an employer incurs for an employee in a given year. Typically, CTC is calculated based on the following key components:
1. Direct Benefits
Direct benefits are the components of your salary that are paid out monthly. These benefits form the bulk of the in-hand salary employees receive. They typically include the following elements:
- Basic Salary
- Allowances such as Medical Allowance, House Rent Allowance (HRA), Transportation Allowance, Leave Travel Allowance (LTA), and Dearness Allowance (DA).
2. Indirect Benefits
These benefits are perks provided by the employer to employees without requiring any out-of-pocket expenses from the employee. While these benefits don’t increase your take-home salary, their monetary value is added to your CTC. Common examples include:
- Tax-saving perks like meal vouchers, education reimbursements, or subsidies.
- Loan schemes provided by the company.
- Life insurance or health insurance plans.
- Leased accommodations.
- Employer-sponsored food plans or transportation services.
3. End-of-Service Benefits
These benefits are designed for the long-term financial security of the employee and are payable at the end of their service or employment contract. Examples include:
- Provident Fund (PF)
- Gratuity
Understanding these components can give you a clearer picture of what’s included in your CTC and how much of it translates to your actual in-hand salary.
Is Gratuity Considered Part of CTC in 2023? What is Gratuity Percentage in CTC?
Under Indian employment laws, gratuity is a statutory right granted to employees. It is not inherently a part of the Cost to Company (CTC) and is calculated separately from an employee’s monthly salary. However, since the year 2000, some companies have chosen to include gratuity in their CTC packages as a strategy to boost employee retention.
Including gratuity in the CTC is not considered unlawful or unethical, provided the employee does not contribute financially towards it. The gratuity amount is entirely funded by the employer.
For private limited companies registered under the Indian Companies Act, providing gratuity is mandatory. However, this benefit is not available from the onset of employment. Employees become eligible for gratuity only after completing five years of continuous service with the organization.
To illustrate, an employer may allocate 4.81% of an employee’s annual salary toward a gratuity fund, which could then be included in the CTC calculation. However, this amount only becomes payable after the employee completes a minimum of five years with the company. If an employee resigns or is terminated before fulfilling this tenure, they forfeit their right to gratuity. That said, the employer may return the previously allocated amount as an ex-gratia payment in such cases.
By understanding gratuity and its provisions, employees can better evaluate their CTC structure and long-term benefits.
Read Complete UAE Gratuity Law Guide 2025.
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 Amount and Its Dependency on Pay Structure
The gratuity amount is calculated as a percentage of an employee’s monthly pay, which includes both basic salary and other allowances. Essentially, this means that the gratuity value directly correlates with the pay structure maintained throughout the employee’s tenure.
Under the guidelines of the Payment of Gratuity Act, 1972, gratuity is typically calculated as 4.81% of the employee’s basic salary. The formula to determine this is as follows:
Gratuity amount= 15/26 * Last Basic Salary * Total Number of Service Years
For those looking to estimate their end-of-service benefit, a Gratuity Calculator is an efficient, free tool. By inputting factors such as total years of service, basic pay, and contract type, employees can quickly estimate their gratuity within seconds.
Is Gratuity and CTC Taxable?
- Gratuity is taxable but can qualify for exemptions under the Income Tax Act, 1961, depending on specific conditions.
- Both gratuity and CTC are part of taxable income, yet their taxation varies based on payout details and allowances.
Does Gratuity Inclusion in CTC Mandatory in India? What Does the Law Say?
By definition, the Cost to Company (CTC) represents the total amount an employer spends on an employee, factoring in all benefits, whether direct or indirect. Gratuity, meanwhile, is calculated based on the employee’s final basic pay and dearness allowance (DA).
There is no legal requirement in India that mandates the inclusion of gratuity in CTC. Many organizations voluntarily include it to enhance compensation package transparency and improve employee retention rates. If an employer deducts an amount under the guise of gratuity from your salary, this amount can typically be reclaimed before completing five years of service. However, this reimbursement will not officially be considered as gratuity payments.
Is Gratuity Part of CTC in Accenture, TCS, and Cognizant?
Companies like Cognizant, Accenture, and TCS do not usually include gratuity as part of the Cost to Company (CTC). For Indian employees, gratuity is deemed a statutory benefit and remains separate from the CTC structure, regardless of the organization.
Does Inclusion of Gratuity Part of CTC Impact Employee’s Monthly Salary?
Including gratuity in the CTC structure can influence how an employee perceives their overall compensation, but it doesn’t necessarily alter the in-hand salary each month. Instead, gratuity is structured as a benefit that is only paid out upon meeting certain eligibility criteria, most commonly upon completing a minimum of five years of continuous service.
Thus, while it adds to the employee’s total remuneration, the immediate impact on monthly salary is minimal. Its value is realized over the course of long-term employment.
Conclusion
The debate over whether “Gratuity Part of CTC” goes beyond mere accounting definitions. It underscores the importance of understanding how compensation structures are built. Although gratuity enhances overall benefits, it doesn’t equate to a direct increase in the employee’s monthly take-home pay.
If you have further questions about gratuity or CTC calculations, feel free to reach out. We’re here 24/7 to guide you through your queries and provide assistance.
