Understanding Gratuity Deductions: How Is the 4.81% Rate Calculated?

Dear Seniors, can anybody tell me how we get 4.81% of the basic salary as the rate of deduction for gratuity? I want the mathematical calculation explained.

I just want to know how we get this formula - 4.81% of Basic for calculating the amount for gratuity deduction.

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Calculation of 4.81% Gratuity Rate

The basis of 4.81% is as follows:

Let us take an employee's basic pay as Rs. 100/-. Gratuity eligibility per year is calculated by taking the latest basic pay, dividing it by 26, and then multiplying by 15.

The calculation is: 100 / 26 * 15 = 57.69231.

For one month: 57.69231 / 12 = 4.81 per month.

Regards,
Balaraman - TVS, Chennai

Gratuity in CTC: An Unreasonable Practice

In my viewpoint, the calculation of Gratuity in the CTC of an employee is an eye-wash. I don't know which HR fellow introduced this in their company, where, when, or why. Over the years, many companies have followed this bad precedent.

If an employee only receives this amount as Gratuity after completing their 5th year of continuous service in a company and gets relieved on resignation or superannuation, I, as an HR professional, dislike this practice. I have never introduced it in any company where I have worked so far. For the same HR professionals, the same rule applies—only if they complete the full term of 5 years will they receive this benefit.

There is no use for an employee who quits the company before completing 5 years of service. Another benefit, called the Superannuation scheme, is also highly unreasonable to be included in the CTC.

Regards,
K. Gopalakrishnan
ASPI - Sriperumbudur

Dear HR Fraternity/Others,

Understanding Gratuity in CTC

One more thing: whether the company includes this gratuity in your CTC or not, you have to be provided with the gratuity automatically once an employee completes five years of continuous service amicably and quits the company. It is not a monthly or annual coolie; it is a benefit that a company offers to its employee for good conduct and continuous work for five years rendered for the company. Including 4.81% in monthly CTC and annual CTC is something fishy. If anyone gets their offer letter, please do not hesitate to ask the top HR fellow what your take-home pay (THP) will be, as that's more important. Even some fellows will include the Group Medical Insurance Policy amount, which a company pays annually to the insurance company, in your CTC. Please be careful, juniors.

Regards,
K. Gopalakrishnan
Sriperumbudur

It has to be included in CTC. CTC represents the cost to the company, and gratuity coverage starts from the date of joining. The company has to contribute an annuity amount every year for all employees, whether they have been with the company for 5 years or less. As per the Gratuity Act, if anything happens to an employee's life immediately after drawing one month's salary, the surviving family members will receive the full gratuity amount.

Regards,
Bala, Chennai.

Gratuity Deductions and CTC Considerations

First and foremost, there cannot be any deduction of any percentage against gratuity from an employee's salary. It is illegal and most unfair. I am of the opinion that including gratuity in the CTC of an employee is not fair. After all, an employee becomes eligible for gratuity ONLY after completing 5 years of continuous employment with the company. If the employee decides to leave the company or is asked to leave before 5 years, he/she will be deprived of this benefit.

CTC Fixation and Salary Negotiations

CTC fixation calls for salary negotiations, and most times the employee's current remuneration package becomes the basis for deciding the new CTC. At times, some smart candidates also include leave encashment in their current CTC with the intention of getting a better package. How do we address such a situation?

Best Wishes,
Vasant Nair

Understanding Gratuity Percentage Calculation

The calculation of the gratuity percentage is not as simple as illustrated in these discussions. If employers are showing gratuity at 4.81% and including it in the CTC, they are, in a way, misleading the candidate. This percentage is valid only if the person leaves the company after 5 years. If a person leaves before this period, they are not entitled to it. Determining the gratuity percentage is a separate science in itself. It is akin to how life insurance premiums are calculated.

Factors Influencing Gratuity Contribution

The factors that influence the gratuity contribution by the company towards its employees include:

- Salary of all the employees
- Date of birth of each employee
- Retirement age of employees
- Number of years the employee has worked in the company

These data are requested every year by the organization managing the company's gratuity fund (often LIC). Upon receiving these data, the organization calculates the amount the company should deposit in this account. In my 30 years of experience, the percentage has not exceeded 0.5% of the total basic and DA. It is important to note that there is a cap on the gratuity payable to an individual when they leave the company, hence the low percentage.

I hope I have clarified this well.

Best wishes,
V.T. Avadhany

Dear Mr. Gopalakrishnan,

In our group of companies, where I head the HR functions, we include gratuity in the CTC. However, if employees leave the company before completing 5 years of service, the amount considered for gratuity in the CTC is paid back to them in their final settlement.

Additionally, you might consider having the gratuity policy with insurance companies, which I am sure you may be aware of.

Regards,
Dhinakaran

Good that you have replied. Only if anything happens to an employee's life will his surviving family members receive the full gratuity amount; otherwise, it is of no use at all. You are correct, Bala—most companies are not including gratuity in CTC based on my experience.

Regards,
K. Gopalakrishnan

What Dinakaran sir said about the policy on payment of gratuity in his organization is quite fair and shows a good gesture towards its human resources. If we use the 4.81% formula when calculating gratuity for any employee, departing from the formula stipulated by the Act, the employee will lose some amount. Therefore, the 4.81% calculation may only be used when issuing the CTC sheet to the employee, and the calculation should be as per the Act. Hope the new labor code will provide the right direction for the HR fraternity.

Thanks,

Krishna Kumar