Why Do Some Companies List Gratuity Deductions in Salary Offers?

According to my knowledge, gratuity is purely an employer's contribution. However, why do some companies mention the gratuity deduction in the offer letter salary breakdowns? An employee is not sure if he/she will spend 5 years in the organization or not. How will it be possible to deduct from the employee's salary?

Ideally, they should not include it. However, to make the Cost to Company (CTC) appear more attractive and because it is a cost factor for them, companies often include gratuity in the salary breakup when making an offer.

Regards,
Ukmitra

The gratuity is payable to an employee by the employer after the completion of a stipulated period of service as per the Gratuity Act. Hence, this becomes a cost to the company and is mandatory to show in the salary breakup. However, the same is not deducted from the salary earned by the employee.

Period of Service and Gratuity Inclusion

Regarding the period of service, whether an employee serves for 5 years or not, it does not mean that the employer will not include the gratuity component in the CTC sheet of the employee. However, if the employee does not fulfill the condition of service for availing gratuity, he will not be entitled to receive the same.

In short, gratuity is a kind of retention tool used as a welfare measure for employees, at least in my opinion as an HR person.

Thanks,

Bijay

Understanding CTC and Net Salary

Do not be too carried away by the sum shown as CTC. Calculate the net salary and benefits you get before accepting an offer. Mentioning gratuity and the employer's share of EPF is an attractive gimmick. They are statutory obligations.

Regards,
Varghese Mathew

Understanding Gratuity in CTC Breakup

The gratuity component shown in the CTC breakup is only the provision the company makes in the event the employee has to be paid gratuity at the time of leaving the company after completing service as per the provisions of the Gratuity Act. It is not a deduction from the employee's salary.

Some companies contribute every year towards a Group Gratuity scheme promoted by LIC of India. LIC of India furnishes an actuarial valuation of the liability of the employer every year, and the employer contributes the amount indicated by LIC to bridge the liability. When an employee leaves, the employer submits an application for payment of gratuity, subject to the condition that the employee fulfills the criteria as stated above. Based on this application, LIC of India effects the gratuity payment to the employee through the employer, subject to the availability of funds in the employer's account. In other words, only if the employer contributes and pays up the amount to LIC will the amount be available in the employer's account. So, to fund this scheme, employers include this as part of CTC in the salary component. However, if the employee does not fulfill the eligibility criteria for receiving gratuity, he will not receive gratuity. The contributions paid by the employer in respect of this employee will be set off against the future liability of the employer.

Trust the matter is clear.

Regards,
M.V. Kannan

Dear Seniors and Friends,

If management is showing gratuity as a part of salary in the CTC, then if an employee leaves before 5 years, management has to pay their gratuity because this is part of the salary as per my understanding. I would appreciate your valuable comments.

Regards,
Snitu

CTC and Gratuity Deductions

CTC can be included in the salary, and there is no violation. However, if the company is deducting the CTC, then the employer has to pay even if leaving the company before completing 5 years.

Regards

Understanding Gratuity Payment

Gratuity payment, as Mr. Kannan said, is a cost incurred when engaging an employee in the organization. Don't you calculate and prepare your estimate when conducting a function at home? Similarly, an employer prepares a budget sheet (maybe CTC-based) when engaging an employee. It is up to the employee to accept or reject.

There is no gimmick or tactic required for an employer to entice an employee. The company needs to set aside a gratuity fund so that when an eligible employee applies for their gratuity, the company must be able to pay as it is a statutory obligation.

There is no requirement to pay gratuity when an employee separates before the stipulated period as per the provisions of the Act, even if it is included in the CTC.

Regards,
V. Balaji

Mr. Balaji is right. However, I feel the need to add that gratuity is a statutory component of an employee's salary for which every employer is responsible to comply.

Gratuity as a Retention Tool

On the other hand, I find that many employees are misled about its terms and conditions. HR persons, on behalf of the employer, can use this privilege of gratuity as a retention tool by spreading proper awareness among employees under the directives and as per the policies of the company.

Thanks,
Bijay

Mr. Khannan has given clear information about Gratuity. I have a small clarification. In case an employer contributes to LIC of India on a yearly basis and an employee leaves before eligibility, what will LIC of India do in this case? Will they pay back to the employer or reduce the proportionate amount in the next contribution?

Actually, it is a cost factor for the employer, so they add it to the offer letter as salary break-ups.

Mr. Khanna has already clarified in his reply that if any employee leaves the company before the completion of the prescribed period, the amount of gratuity paid to the LIC will be set off. This means that an employee who leaves the company before completing five years will not be eligible for the gratuity payment. However, the amount held by the LIC to this extent will be adjusted in the following amount to be paid by the employer to LIC. Hope this is clear now.

Regards,
Eswararao Ivaturi.

Hi,

I have a query. If an employer does not include Gratuity as part of CTC and the employee has completed at least 5 years of service, and the employer has not made any contributions every year, how do you calculate Gratuity? Will it be limited to the formula: Last drawn basic x number of years of service x 15/26?

Irrespective of whether the employer makes a contribution or provision for Gratuity, if the employee completes the eligibility period of 5 years (now companies pay if the employee completes 4 years of service and 240 days in the 5th year), the employer has to pay Gratuity as per the provisions stated by you.

Regards,

M.V. Kannan