Confused About Gratuity Deductions? What Happens If You Leave or Retire Early?

I have one query about gratuity. Some companies deduct the gratuity amount monthly from employee salaries. What happens if an employee leaves the company after two years and joins another company? What happens if an employee retires after three years working in the same company? As per my knowledge, they will not be eligible as per the Payment of Gratuity Act. Then what happens to the deducted amount for two or three years? Can the employee legally receive it, or is it at the company's discretion to give it or not? Please advise me in detail as I have a big confusion about this issue in gratuity.

Thanks & Regards,
Parul
ERP HR & Payroll Consultant

As per the statute, the employer needs to make a provision of 4.81% of the amount on the basic pay. If an employee resigns and leaves the organization before the stipulated period, i.e., 4 years and 240 days, then they will not be eligible for gratuity payment.

Regards,
Ramesh

Clarification on Gratuity Provision

No statute says that an employer has to make a provision of 4.81% of the basic for gratuity. You may be guided by Sec. 4-A of the POG Act, but that is not yet implemented by the Government of India. One more thing, gratuity is not paid on basic alone. Dearness allowance (DA) is also considered if paid.

Regards,
Varghese Mathew
[Phone Number Removed For Privacy Reasons]

The employer has no right to deduct the applicable Gratuity Amount from the employee's salary. Gratuity is payable to an employee by the employer once he/she completes 5 years of continued employment. Normally, the employer reflects 4.8% of Basic + DA amount of the employee as the Gratuity amount while calculating his/her yearly/monthly CTC. Many companies consider Gratuity, PF (Employer), ESIC, Medical Insurance, Life Insurance, Bonus, etc., towards the calculation for the employee's CTC. Nevertheless, the Gratuity amount cannot be deducted from the employee's salary, as it is a facility provided by many employers for the purpose of the employee's continued services with them.

Thanks & Regards,
Vijayan K

Dear Parul,

As many members pointed out, it is wrong and illegal to deduct gratuity contributions from the salary of the employee. Gratuity is a contribution from the employer to the employee to be paid when the employee leaves (due to resignation, death, or termination) the employer, once they become eligible for gratuity payment under the Act.

"Unless the employee's payroll is calculated based on the CTC pattern, where all 'Cost to Company' components are indicated, and thus a proportional gratuity could be shown as a deduction..." I don't believe any employer shows all the components of CTC on the payroll slip.

An employee becomes eligible to receive gratuity after completing 4 years and 240 days of 'continuous service.' Therefore, for services with less than 4 years and 240 days, the employee is not eligible for gratuity payment, and the contribution made on their behalf is forfeited and reverts to the employer's kitty. Additionally, the gratuity corpus does not distribute accrued interest to employees like EPF.

Regarding retiring after serving for 3 years - how is that possible? Did the employee serve elsewhere for the rest of the period? Your query is unclear. However, the requirement of 4 years plus 240 days of service is strict, except in cases of death, permanent disablement, firm closure, etc.

Unlike EPF and EPS, which can be paid or transferred to the next employer, gratuity cannot be transferred to the next employer, except in the case of Government and PSU sectors where gratuity can be transferred to the next employer by mutual consent, remitting the equivalent amount like EPF, with or without accrued interest.

Are you clear, friend?

Regards,
Kumar S.

Hi! Just needed to know—if a company is paying gratuity to an employee at the point of retirement, are they also supposed to encash balance leave? I had understood it as 'no' but want to be sure before I advise management.

Thanks,
Menon

Hi Matthew, thank you for the information. I have gone through Sec. 4-A of the POG Act and found information on provisions, but 4.81 was not mentioned. How do companies consider 4.81% for the provision of Gratuity?

Regards, Ramesh

Understanding Gratuity Calculation

4.81% of the monthly salary is the gratuity payable to an employee.

For example:
Monthly salary = Rs 1000/-
Gratuity for one year = 1000 * 15/26 = Rs 577/-
Gratuity portion for one month = 577/12 = 48.08, i.e., 4.80%

Regards,
Varghese Mathew

I was working with an autonomous body under the Government of India from 15th March 2001 to 21st March 2013. Out of this, my service from 15th March 2001 to 30th June 2005 was on a contractual basis, and on 1st July 2005, I became a permanent employee. I resigned from the organization on 21st March 2013.

When I was given the gratuity, only the period from 1st July 2005 to 21st March 2013 was considered, and the period from 15th March 2001 to 30th June 2005 was not considered, even though there was no break in my service.

After I got relieved from the organization, the Central Government declared a DA increment with effect from January 1st, 2013. Am I eligible for gratuity with this increase in DA?

Kindly guide me.

Regards,
Satheesh

Eligibility for Gratuity Under the Payment of Gratuity Act

As per the Payment of Gratuity (POG) Act, you are eligible for gratuity from 2001 if you were working in an industrial establishment. If you were in an autonomous body governed by Government of India (GOI) service rules, the matter is different.

Regards,
Varghese Mathew
[Phone Number Removed For Privacy Reasons]

Gratuity Deduction for Employees Leaving Before 5 Years

My question is, what to do with the amount that is deducted from an employee if the employee leaves the company before 5 years, say in two or three years? Will the employee get that deducted amount back or not, as he has not completed 5 years in the same company as per the POG act?

Please reply.

Thanks,

Parul

As pointed out by many, deducting any amount from an employee's salary earned by them towards gratuity is illegal. If a deduction is notionally shown from CTC, it is okay. Otherwise, the deducted amount should be refunded by way of correcting a mistake.

Regards