Is It Normal for Companies to Deduct Gratuity from Salary? Seeking Clarity on New Policy

Dear Friends,

My brother has been working in a private company for the past 5 years, and starting from October, his salary has been increased. His company provides gratuity to its employees.

I would like to ask the following questions:

1) Until now, his gratuity was not included in his CTC. However, from October onwards, with the salary increase, the gratuity is now being shown in his CTC, and a certain amount is being deducted from his salary. Is this arrangement acceptable?

As far as I know, gratuity, unlike PF & ESIC, is supposed to be solely contributed by the employer and not the employee. Can you confirm this?

I have come across information stating that the contribution towards gratuity may vary from one company to another. If that is the case, can a company that previously did not deduct gratuity from the CTC begin doing so now?

What is the actual procedure for contribution towards gratuity? I understand the formula for calculating gratuity, but I seek clarification on the contribution procedure, both from the employer's and the employee's perspectives.

I look forward to your prompt responses.

Regards

Dear Titili,

As far as PF, ESIC, and Gratuity are concerned, the following facts should be noted:

For PF: Employer contribution will be 12% of his Basic and D.A. Though most companies under the name of CTC show that the employer is contributing, it gets deducted from the employee's CTC only. The practice of showing it in CTC is wrong.

ESIC: Employer contribution is 4.75% of the total salary (not exceeding 10,000/-). The same cannot be shown as a part of CTC.

Gratuity: When an employee completes 5 years of service, the company is liable to pay him gratuity at the time of his exit. Contribution for the same cannot be collected from the employee's salary. It has to be an amount that the company has to pay.

Sanjeev

There are companies that even show the gratuity in the payslip right from the first month of the employee's joining. Your brother's establishment has only shown it after he has become eligible for gratuity!

Gratuity is a payment to be made by the employer alone when an employee leaves the organization after serving for at least 5 years. The amount of gratuity depends on the salary of the employee at the time of his exit. If the employee leaves after 20 years, his gratuity will be based on his salary at that time, after 20 years. How can we predict what his salary would be after 20 years? It is not possible. Therefore, there is no logic in showing gratuity as part of salary or Cost to Company, as it is referred to.

Regards,
Madhu.T.K

Hi Titli,

There is no contribution that the employer has to make for gratuity. It is just that if an employee leaves the organization after completing 5 years, he is eligible for gratuity. The amount is calculated based on the last drawn salary of 15 days multiplied by the completed number of years of service.

In your brother's case, as he has now become eligible for it, and if he leaves, the gratuity paid by the company is the cost spent on your brother. That is why it is showing in his CTC.

Dear Friends,

My brother has been working in a private company for the last 5 years, and starting from October, his salary has been increased. His company provides gratuity to the employees.

I have a few questions I would like to ask:

1) Until now, his gratuity was not included in his CTC. However, starting from October, with the salary increase, the gratuity is now being shown in his CTC, and some amount is being deducted from his salary. Is this acceptable?

As far as I know, gratuity, unlike PF & ESIC, is meant to be solely contributed by the employer and not the employee. Am I correct in this understanding?

I have come across information stating that contribution towards gratuity varies from company to company. If this is the case, can a company that previously did not deduct gratuity from the CTC begin deducting it now?

What is the actual procedure for contribution towards gratuity? While I am familiar with the formula for calculating gratuity, I would like clarification on the contribution process - both from the employer's and employee's perspective, if applicable.

I look forward to your prompt responses.

Regards

Hi Titli,

Gratuity is payable after completing 5 years of service with an organization.

I am providing some details regarding gratuity that may help clarify some of your doubts:

Please note that the gratuity amount must not exceed Rs. 3,50,000. For government employees, any amount of gratuity received is completely exempt from tax.

However, for non-government employees, please take note of the following points:

1) For non-government employees covered under the Payment of Gratuity Act, 1972, tax exemption is based on the following:
a) 15 days' salary last drawn for each completed year of service (15 days salary x length of service)... salary amount x 15/26
If the service period is 6 months or less, please disregard it. If it exceeds 6 months, consider it as 1 year.
b) Rs. 350,000
c) Actual gratuity received

2) For non-government employees not covered under the Payment of Gratuity Act, 1972, tax exemption is based on:
a) Rs. 350,000
b) Half month's average salary for each completed year of service
c) Actual gratuity received

However, some organizations have a more lenient approach to Gratuity Receiving Eligibility: you may be eligible for gratuity after completing 4 years and 8 months in an organization that operates 6 days a week, or after 4 years and 6 months in an organization that operates 5 days a week.

Thank you and regards,

Ayona

I have a few queries regarding gratuity. As far as I know, as soon as the gratuity becomes payable, the employer must determine the amount and send a notice to the person who is eligible for the gratuity within 15 days from the receipt of a claim from the employee. Is this right? My question is: within what time (is there a time constraint?) should the employer send the notice to the eligible employee? As far as I know, payment of gratuity should be made within 30 days from the date it becomes payable. Can anybody please send me a salary break-up attachment showing the gratuity calculations? Thanks and regards, Ayona.

Hello to all,

Please help me in the matter of gratuity. We are paying our employees' gratuity on a monthly basis. Can we pay ESIC contributions on gratuity or not? Please suggest urgently.

Jitender

Under any Act, gratuity is not a part of salary, and the ESI Act also defines wages as emolument excluding gratuity. Hence, no contribution is payable on gratuity paid. However, at the same time, gratuity, being a sum payable by the employer to the employee at the time of the employee's exit, that exemption is applicable only to such gratuity which is payable at the time of discharge of the employee only. In other cases, it shall be treated as part of remuneration. Since it is paid monthly and not at an interval of more than two months, there is every chance that it will be deemed as omitted wages.

Please ignore if I am wrong. Why do you pay gratuity monthly when gratuity is payable only when an employee leaves the establishment after rendering a service of at least five years? How do you calculate such monthly gratuity? Is it based on any projected salary which would accrue after five years, ten years, or twenty years because we cannot project how long an employee will stay with us and how much the salary will be when he leaves?

Madhu.T.K

Hello everyone, I'm new to this HR field. I have a query about gratuity. What is the rule for accumulation of gratuity for a private firm? Can contributions be recovered from the employee's salary just like ESI and PF, or is it purely a contribution from the employer? Please guide me.

Thanks and Regards,
M. Srinivasa

It is already clarified that gratuity is not to be deducted from salary like EPF. It is a payment to be made exclusively by the employer when an employee leaves the organization after rendering a minimum service of five years. There is no question of the accumulation of gratuity out of the salary paid to employees. Still, in order to provide for gratuity, the employer is expected to provide an amount equal to the estimated amount of gratuity payable every year by subscribing to policies of LIC of India.

Regards,
Madhu.T.K