Understanding Gratuity Laws for Employees with Yearly Salary Packages: What Should You Know?

Hi, can I know what the gratuity law is for a person whose yearly package is paid instead of monthly salary?

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In most countries, the payment of gratuity is based on the total salary earned by an employee during their employment period. The gratuity amount is usually calculated as a percentage of the employee's basic salary and is payable when the employee completes a certain number of years in service with the employer.

For employees who receive their salary on a yearly basis, the gratuity would still be applicable based on the total annual salary earned. It would be calculated in the same manner as for employees receiving monthly payments, considering the total annual earnings as the basis for determining the gratuity amount.

It's essential for both employers and employees to understand the specific laws and regulations regarding gratuity in their respective countries to ensure compliance and fair treatment for all parties involved.

You cannot pay salary on a yearly basis because, as per the Payment of Wages Act, no wage period should exceed more than one month. You may offer salary on a yearly basis as it looks more attractive to say Rs 3.6 lakhs per annum as salary, but you should pay it as Rs 30,000 per month only. Therefore, there is no question of calculating gratuity for a person who has been offered salary on a yearly basis. Calculate gratuity based on his last month's salary.

Regards,

Madhu.T.K

Hi,

Per the Gratuity Act, every employee who completes 5 years of service in a given organization is eligible to receive gratuity from their employer. As Mr. Madhu T.K mentioned, if salary is provided and paid to an employee on a yearly basis, it needs to be divided by 12 months to determine the monthly salary/wage. The salary or wage cannot be paid on a yearly basis; as mentioned previously, the wage must be paid on a 30-day period as per the acts enforced in India.

Therefore, an individual to whom the employer pays a yearly salary is entitled to receive gratuity from their employer using the following calculations: yearly salary / 12 months = 1 month's salary / 26 days = per day's salary x 15 days per year of service x number of years served in the organization (the number of years should exceed a 5-year period) = total gratuity the individual will receive.

Mohan Rao
Manager HR

Hi,

As you mentioned, gratuity is calculated based on the last drawn salary by the employee. Now, considering the salary in the last couple of years is as per the minimum wage act, and prior to that (perhaps 2-3 years ago) if the salary was below the minimum wage act, can the employee demand the difference amount for all those years?

Thanks.

Hi all,

My question is different. Actually, in our organization, gratuity is included in the salary package. Is it liable as per the law? Because, as per the Gratuity Act, one can be eligible for gratuity after completion of five years only. So, if someone leaves the organization before five years, then they will lose their gratuity amount which is included in the salary package.

If gratuity is included in the salary and an amount is deducted every month from gratuity with a view to paying it when the employee leaves, the same is payable even if he is leaving before five years.

As per law, gratuity is an amount payable by the employer alone, and the employer is not supposed to deduct it from the employee. This is a practice developed by the new generation HR, by which all present and future costs that the employer incurs due to employing a person are included in the salary/remuneration/CTC of that person so that the amount offered will appear very attractive. While accepting such offers, you should make an understanding of what your actual salary will be. Since the employer has not offered any "salary" but has only shown the "Cost To Company" by employing you, there is nothing wrong from the employer's side either. However, if gratuity is shown as a deduction from gross salary in your PAY SLIP (which is a legal document), then things will change, and the employer will be liable to refund such deduction when the employee demands it or when he leaves the organization. This is because the employer is not supposed to make any deduction that is not permitted in the Payment of Wages Act, and deduction for gratuity is not a permissible deduction.

Regards,

Madhu.T.K

Dear sir,

Thank you very much for your attention to this matter.

Our employer has not mentioned the gratuity amount in the Pay Slip. However, as it is counted as a part of the employee's Cost to Company (CTC), we can say that it is one kind of deduction for an employee, which they will not get back (similar to Bonus, LTA, or Medical benefits) if they do not complete 5 years of employment.

In my opinion, it is not a liability on the employee's side. If gratuity is considered a part of the CTC, then it should be paid even if the employee does not complete 5 years of employment.

Thank you.

Hi all,

Mr. Madhu T.K. has explained clearly. The Employer holds no right to deduct gratuity from an employee's salary/wage. If he deducts, he is engaging in illegal activities. CTC is a sum only for the sake of showing how a company pays an individual employee and what the wage load for a company would be for a given financial year.

For example, the employer's share of PF, ESI, is also a part of CTC. Do you mean the employer deducts the employer's share of the above elements from the employee's salary/wage? No, he does not. Hence, the same applies to gratuity.

Mohan Rao Manager HR