What Is Gratuity in Salary? Is It Part of Your CTC?
Summary
This blog explains what gratuity is in an Indian salary structure, clarifying that it is an employer-funded statutory benefit, not a monthly deduction. It covers the 4.81% CTC provisioning, 5-year eligibility rules, calculation formulas, and upcoming labour code updates.
Every year, thousands of employees across India sign offer letters without fully understanding one line item that sits inside their CTC: gratuity in salary. Some think it is a bonus. Others believe it gets deducted from their salary every month. A few have never questioned it at all.
This blog breaks down what is gratuity in salary, how it fits into your CTC structure, how it is calculated, and what your legal obligations are.
What Is Gratuity in Salary? Definition
Gratuity is a consolidated one-time payment that an employer makes to an employee as a token of appreciation for the latter's long-term service.
It is neither a bonus tied to the employee's performance nor a monthly deduction from their take-home pay. It is a statutory benefit, a legal obligation that every qualifying employer in India must honour when an employee exits after meeting the eligibility criteria.
The Payment of Gratuity Act, 1972, controls this benefit. Passed by Parliament on 21 August 1972, the Act came into force on 16 September 1972 and has since been amended multiple times.
Who Is Eligible for Gratuity?
Understanding eligibility is fundamental before you design your payroll or answer an employee's query about what is gratuity in salary. Below are the main requirements for claiming gratuity.
- Minimum service: An employee must complete at least five years of continuous service with the same employer.
- Applicable establishments: The Act applies to every factory, mine, oilfield, plantation, port, railway, shop, or establishment that employs ten or more people.
- Fixed-term employees: Under the Code on Social Security, 2020, employees on fixed-term contracts are now eligible for pro-rata gratuity after just one year of service. This is a significant shift from the old five-year threshold.
- Death or disablement: The five-year rule is waived entirely if the employee dies or is permanently disabled while in service.
- Rounding rule: If an employee completes four years and more than six months in the final year of service, that partial year is rounded up to a full year for calculation purposes.
If you happen to be an HR team handling different employee categories, it would instantly mean you will have a tough job of keeping track of eligibility rules by hand across these teams. Over time, it will become impossible. Payroll platforms such as Mewurk help you maintain accurate service records and facilitate smoother gratuity calculations during employee exits.
Is Gratuity in Salary Part of Your CTC?
This is the question that most HR professionals and employees debate. The short answer is: yes, in most Indian companies, gratuity is shown as a component of the Cost to Company (CTC). But there is an important distinction to understand.
CTC = Gross Salary + Employer Statutory Contributions + Other Benefits
Gratuity is an employer-side cost. The employer provisions for it annually, typically at approximately 4.81% of the employee's basic salary plus dearness allowance (derived from the formula 15 ÷ 26 ÷ 12).
This amount appears in the CTC breakup because it represents a real financial liability the company carries on behalf of the employee.
However, gratuity is never deducted from the employee's monthly gross salary. It is not visible on a monthly salary slip as a deduction. The money is not handed to the employee each month. It accumulates as an employer-side provision and becomes payable only at the time of exit.
Many organisations include gratuity as part of CTC while maintaining separate employer-side provisions in payroll. Modern HR and payroll systems like Mewurk allow finance and HR teams to structure salary components correctly and avoid confusion during offer creation.
The CTC vs. Take-Home Contrast
| Component | Visible in Monthly Salary Slip? | Paid Monthly? | Paid at Exit? |
|---|---|---|---|
| Basic Salary | Yes | Yes | No |
| HRA | Yes | Yes | No |
| PF (Employee share) | Yes (as deduction) | No (deposited to PF) | On withdrawal |
| PF (Employer share) | Part of CTC | Deposited to EPF | On withdrawal |
| Gratuity | No (CTC only) | No | Yes, on exit |
| Performance Bonus | Sometimes | Quarterly/Annual | No |
So if a candidate sees ₹12 lakh CTC and assumes ₹1 lakh per month in hand, the reality is different. Roughly ₹4,807 of that monthly CTC figure is the gratuity provision that they will receive only after five years of service.
What Is Gratuity Deduction in Salary?
A question that comes up repeatedly in HR forums and payroll audits is: what is gratuity deduction in salary? The answer is simple but often misunderstood.
Gratuity is not deducted from the employee's salary. It is entirely an employer liability. Deducting gratuity from an employee's gross or net pay is not permitted under Indian labour law.
If any employer is showing gratuity as a deduction on the employee's payslip and reducing their monthly take-home, that practice is misleading and potentially unlawful.
What you may see in CTC structures is the employer's annual provision or contribution toward a gratuity fund, which is an internal accounting entry. That is not a deduction from the employee's earnings. It is the company setting aside money for a future legal obligation.
What Is the Percentage of Gratuity in Salary?
One of the most searched questions in payroll is: What is the percentage of gratuity in salary?
The standard percentage that most Indian payroll systems and HR teams use is 4.81% of Basic + DA, calculated annually. Here is where that number comes from:
Gratuity per year = (Basic + DA × 15) ÷ 26 ÷ 12 = Basic + DA × 0.0481 ≈ 4.81%
This is an approximation used for provisioning purposes. The actual gratuity payable is calculated using the formula below at the time of exit, using the last drawn salary.
How to Calculate Gratuity Amount in Salary: The Formula Explained
For Employees Who Are Included Under the Payment of Gratuity Act
Formula: Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26
Where:
- Last Drawn Salary = Basic Pay + Dearness Allowance (DA)
- 15 = 15 days of wages
- 26 = Average working days in a month (excluding Sundays)
Example: An employee with a last drawn Basic + DA of ₹60,000/month and 8 years of service: Gratuity = (60,000 × 15 × 8) ÷ 26 = ₹2,76,923
For Employees Not Covered Under the Act
Formula: Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30
Here, 30 is used instead of 26, which results in a slightly lower payout.
Key Limits to Know
- Maximum statutory gratuity: ₹20,00,000 (any amount above this is taxable in the hands of the employee)
- Payment timeline: The employer must pay within 30 days of the gratuity becoming due. Delays attract simple interest.
What Is Gratuity in Salary Slip? Why It Doesn't Appear Monthly
Many employees scan their payslip every month and wonder what is gratuity in salary slip, and why they can't see it. Gratuity does not appear as a line item on monthly salary slips because it is not a monthly payment. It is a deferred benefit.
You will find it mentioned in your offer letter or appointment letter, usually in the CTC breakup section. Some companies display the annualised gratuity provision in the CTC sheet alongside components like basic salary, HRA, and PF employer contribution.
When you eventually resign, retire, or separate from the company after completing five years, the gratuity amount is calculated and released as part of your Full and Final (F&F) settlement. That is when it becomes real money in your bank account.
Gratuity Under the New Labour Codes: What HR Must Know
The Code on Social Security, 2020, brought several changes to how we think about gratuity in salary and employment benefits more broadly. While full implementation across all states is still unfolding, here are the updates that matter to you as an HR leader.
Three Key Changes of Gratuity in Salary Under the New Labour Codes
1. Fixed-Term Employee Eligibility
Fixed-term contract employees are now eligible for pro-rata gratuity after completing just one year of service. Earlier, only permanent employees completing five years qualified.
2. Wages Redefined
Basic wages must now constitute at least 50% of the total CTC. This directly impacts the gratuity base, since gratuity is calculated on basic salary plus DA.
If your current structure has an inflated allowance component with a low basic, the effective gratuity liability will increase once the new codes are enforced.
3. Government Flexibility on Ceiling
The amendment to the 2018 Act allowed the Central Government to revise the gratuity in salary ceiling through a notification instead of requiring a fresh legislative amendment. The government now has the flexibility to revise the ₹20 lakh cap in the future.
Tax Treatment of Gratuity: What Employees Receive
Understanding what is gratuity in salary also requires knowing the tax side as well.
| Employee Category | Tax Exemption Limit |
|---|---|
| Government employees (Central/State/Local) | Fully exempt |
| Private sector employees covered under the Act | Least of: actual gratuity, 15 days' salary per year, or ₹20 lakh |
| Private sector employees not covered under the Act | Least of: ½ month's average salary per year, ₹20 lakh, or actual amount |
Any gratuity received above ₹20 lakh by a private sector employee is taxable as income in the year of receipt.
Under the new tax regime from FY 2024-25, the general tax-free limit for certain retirement benefits has been revised, but the ₹20 lakh ceiling for gratuity under Section 10(10) of the Income Tax Act continues to apply for Act-covered private sector employees.
Common HR Mistakes Around Gratuity Provisioning
It is a growing pattern among organisations to either underestimate their gratuity liability or miscommunicate it to employees. Here are the mistakes worth watching:
Mistake 1: Not Provisioning Monthly
Gratuity is a future liability that accrues from day one of employment. Treating it as a one-time exit payment without maintaining provisions might create balance sheet shocks, especially in large organisations with high attrition.
Mistake 2: Using Wrong Salary Components
Only Basic + DA goes into the gratuity formula. If you use gross salary or CTC as the base, it could inflate the calculation and lead to incorrect provisions.
Mistake 3: Ignoring the 4 Years + 240 Days Rule
Indian courts have, in certain cases, interpreted four years and 240 working days as satisfying the five-year eligibility condition. If you automatically reject gratuity claims from employees who resigned just before the five-year mark, make sure you proceed with caution and legal review.
Mistake 4: Misrepresenting Gratuity in CTC
Showing gratuity in the CTC while simultaneously reducing the gross salary to absorb the cost is a deceptive practice. The employer's gratuity provision should always be an addition to gross pay.
Gratuity Percentage in Salary: A Practical Summary for HR
Here is a crisp reference card you can use internally or share with your HR team to determine what is the percentage of gratuity in salary.
| Parameter | Value |
|---|---|
| Governing Act | Payment of Gratuity Act, 1972 (now under Code on Social Security, 2020) |
| Eligibility: Permanent Employees | 5 years of continuous service |
| Eligibility: Fixed-Term Employees (new codes) | 1 year of service |
| Gratuity percentage in salary (CTC provisioning) | ~4.81% of Basic + DA per year |
| Calculation formula | (Basic + DA × 15 × Years) ÷ 26 |
| Maximum tax-exempt amount | ₹20,00,000 |
| Payment deadline | Within 30 days of exit |
| Applicable establishments | 10+ employees |
Conclusion
In short, gratuity in salary is a trust signal to your workforce and a material liability on your company's books. Having a thorough understanding of what gratuity in salary is, including its calculation, its CTC positioning, and its evolving framework under the new labour codes, makes better payroll decisions.
Did this blog answer your questions? If it did, please share it with HR peers, payroll managers, and business owners who are still wondering what is gratuity in salary.
The clearer we all are about these fundamentals, the more compliant and employee-friendly our workplaces become. Also, consider using dedicated payroll software like Mewurk to make gratuity provisioning and final settlement calculations easier to handle.
Frequently Asked Questions (FAQs)
1. What is gratuity amount in salary for a new joiner?
For a new joiner, gratuity is an employer-side cost provisioned at 4.81% of basic salary annually. The usual timeline for a new joiner to become eligible to receive it is only after completing five continuous years of service.
2. Is gratuity shown on the monthly salary slip?
No. Gratuity does not appear as a monthly component on a standard salary slip. It is mentioned in the CTC breakup and paid as a lump sum during full and final settlement at exit.
3. Does Mewurk help with gratuity calculations and employee settlements?
Yes. Mewurk helps maintain employees' complete service records. It can also help you automate gratuity provisioning and manage full and final settlements with greater accuracy.
4. What is gratuity deduction in salary? Is it taken from my pay?
Gratuity is never deducted from an employee's salary. It is entirely an employer liability under the Payment of Gratuity Act, 1972, and no part of it is taken from the employee's monthly earnings.
5. What is the percentage of gratuity in salary used for CTC calculations?
Most Indian employers use 4.81% of basic salary plus dearness allowance as the annual gratuity provision in the CTC structure. It is derived from the statutory formula of 15 days' wages per year.
6. Can an employee receive gratuity before completing five years?
Generally no, unless the employee dies or is permanently disabled during service. Under new labour codes, fixed-term contract employees are eligible for pro-rata gratuity after completing one year of service.
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