When employees receive their job offer or salary structure, they often notice a line that says “Gratuity @ 4.81%” under the CTC (Cost to Company) breakup. But what does it actually mean? Is this amount paid monthly? Will you receive it when you resign? If not, then why is it included in your salary?
In this article, we will clearly explain the 4.81% gratuity rule, its origin, real-life examples, and how it’s different from the actual gratuity you may receive upon leaving your job.
What is Gratuity?
Gratuity is a lump sum benefit paid by an employer to an employee as a token of appreciation for continuous service. It is governed by the Payment of Gratuity Act, 1972.
Eligibility for Gratuity:
You are eligible for gratuity if:
- You have completed 5 years or more of continuous service with the same employer.
- Exception: In case of death or disablement, the 5-year rule is not mandatory.
Why is Gratuity Shown as 4.81% of Basic Salary?
The 4.81% represents an estimated annual cost of gratuity calculated and shown in your CTC. It is not the actual amount you receive monthly, nor is it paid until you complete the minimum qualifying period.
Let’s understand how this figure comes into the picture.
Actual Gratuity Formula (as per Gratuity Act):
Gratuity = (Basic Salary × 15 / 26) × Completed Years of Service
Where:
- 15 = days of salary for every completed year
- 26 = working days in a month
Let’s Reverse This Formula:
We take the gratuity for 1 year of service:
₹Basic × (15 / 26) = ₹Basic × 0.5769
Now divide this yearly provision by 12 months to get the monthly share:
₹Basic × 0.5769 / 12 = ₹Basic × 0.04808
≈ 4.81% of basic salary
That’s how the 4.81% figure is calculated!
Example 1: Gratuity in CTC
Assume your basic salary is ₹25,000 per month.
- Gratuity provision in CTC = ₹25,000 × 4.81% = ₹1,202.50/month
- Yearly gratuity = ₹1,202.50 × 12 = ₹14,430
This amount will be added to your annual CTC, but you will not receive it unless you stay for at least 5 years.
Example 2: Actual Gratuity Payable
Let’s say you complete 6 years of service, and your last drawn basic salary is ₹25,000.
Gratuity = ₹25,000 × (15 / 26) × 6
= ₹25,000 × 0.5769 × 6 = ₹86,538.46
Note: This is the actual gratuity you will receive at exit after 5 years.
Try Free Online Gratuity Calculator
Key Differences: 4.81% in CTC vs Actual Gratuity
| Criteria | Gratuity @ 4.81% in CTC | Actual Gratuity Payable |
|---|---|---|
| Purpose | Estimated provision for future costs | Legal payment as per Gratuity Act |
| Based On | Monthly basic salary | Last drawn basic salary |
| Eligibility | Shown to everyone | Paid after 5 years of service |
| Amount Paid Monthly? | No | No, paid only once at exit |
| Included in Take-Home? | No | No |
| Refundable if Left Early? | No (you don’t get it) | Not applicable |
Common Misunderstandings
- “I see gratuity in my salary slip every month.”
➤ It’s just a provision shown in CTC, not paid monthly.
- “If I leave before 5 years, will I get the gratuity?”
➤ No, unless your exit is due to death or disablement, the law requires minimum 5 years of continuous service.
- “Can employers show more or less than 4.81%?”
➤ While 4.81% is the standard, some companies may budget higher or lower as per their internal policy, though this is rare.
Final Thoughts
The 4.81% gratuity in your CTC is not money you receive monthly or annually. It is an employer-side estimate of what they might have to pay you after 5 years of service.
As an employee, you should know:
- You won’t get this amount if you leave before completing 5 years.
- It’s not part of your take-home pay.
- But it’s real money you are legally entitled to after meeting eligibility.
As an employer, you should:
- Ensure proper provisioning for future gratuity payouts.
- Educate new joiners clearly on what the 4.81% means.
- Make sure it’s not confused with current benefits or deductions.
FAQs on Gratuity @ 4.81%
Q1. Is 4.81% gratuity mandatory in CTC?
No, but most companies use it as a standard way to estimate future gratuity liability.
Q2. Can I withdraw gratuity before 5 years?
No, unless due to death or permanent disability.
Q3. Is gratuity taxable?
Gratuity is tax-free up to ₹20 lakh under Section 10(10) of the Income Tax Act.
Q4. Is it deducted from my salary?
No, it is paid by the employer, not deducted from your salary.
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