Understanding Gratuity: How to Manage and Account for Employee Benefits in Your Company?

Dear M Shekhar,

Gratuity:

Gratuity Act is applicable as we are covered under the Shop and Establishment Act, Delhi. We were not making the provision for gratuity as required in previous years. In the current year, we want to make a provision for gratuity.

- Can we make the provision for gratuity for all the employees who have completed 5 years of service in the current year?
- Can we make provisions for gratuity for all employees irrespective of their tenure of service in the current year?
- How is the Gratuity Fund managed?
- Is insurance mandatory for the gratuity fund?
- Can we pay gratuity to those who have not completed five years of service but the gratuity part has been deducted from their salary?
- If we show gratuity as a part of the salary, how do we manage and account for it?
- What amount and percentage can we show as gratuity in the CTC of the employees?

With Regards

M Shekhar

Dear M Shekhar,

Point-wise comments are made hereunder:

- Can we make the provision for gratuity for all the employees who have completed 5 years of service in the current year?
- Can we make provisions for gratuity for all the employees irrespective of their tenure of service in the current year?
- How is the Gratuity Fund managed?

According to the Payment of Gratuity Act, 1972, it is up to you whether you make any provisions for gratuity in your establishment. The Act does not force you to make any provision or any Gratuity fund. You are to make the payment of gratuity to the eligible employees as and when it is due to be paid.

- Is insurance mandatory for the gratuity fund?
Not mandatory.

- Can we pay gratuity to those who have not completed five years of service, but the gratuity part has been deducted from their salary?
Gratuity is not deductible from the salary of an employee. It is to be given by the employer.

- If we show the gratuity as part of the salary, how do we manage and do accounting?
It cannot be stated to be part of the salary.

- What amount and percentage can we show as gratuity in the CTC of the employees?
When it is to be paid upon completion of continuous service of five years, then how can we show it before this period as part of CTC.

Regards,

R.N.Khola
(Labour Law & Legal Consultants)
09810405361