Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit of his exit from the company.
(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. The cost is to be born by the Company and not an employee, hence Gratuity cannot be a part of CTC.
To understand this part, let us take an Example,
Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Gratuity Components is not a part of CTC. Assuming that the Expected Salary Increase in Basic Salary is assumed to be 10% p.a.
Now Gratuity Payments for the next 5 years will be:-
On Completion of 1 Yr - (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs - (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs - (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs - (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs - (15/26)*41,873*5 = 1,20,788/-
Now for making the payment of gratuity, Company has 2 options :
(i) **“Pay as you go option” **- Where the company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their **resources** and get the tax benefit for the gratuity paid.
(ii) **“Funding Option”** - In this option, the Company decides to Setup an Approved Gratuity Trust. The Investment of the Company is either "Self Managed" or “ Managed by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.
In both above cases, Gratuity is paid by the Employer from his** own resource.**
In case you need more clarification in the above matter then you may visit my blog at (http://www.gratuityconsultant.blogspot.com)