Gratuity Deduction - deducting 4.8%. Which one is correct percentage?

Hi Friends, in our company, we are considering a gratuity deduction of 2.5% from the Basic Salary. Some companies deduct 4.8%. Which percentage is correct? Seeking your guidance.

Regards,
Balaji

There is no concept of deduction of gratuity from the employee; it is basically a provision which should be considered as a cost to the company. It also depends on the companies to make their own provision in terms of maintaining accounts. However, as per the Gratuity Act, 4.81% should be considered as a provision and accordingly calculated and paid to the employee.

Gratuity Payment Under the Payment of Gratuity Act, 1972

Under Section 4 (C) 2 of The Payment of Gratuity Act, 1972, for every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages (Basic + Dearness Allowance) based on the rate of wages last drawn by the employee concerned:

Gratuity payable = [15 / 26] * [Last monthly salary drawn] * [Years of service].

Gratuity Calculation for a monthly basis on its basic wages is = (15/26) / 12 months = 0.577 / 12 = 4.81%

Regards,
Janardan

Dear Mr. Janardan, thanks for your valuable reply. My question was wrong. I totally agree with your reply. But in our company, we are considering Gratuity @ 2.5% as part of CTC. Can this percentage be considered or not?

Regards,
Balaji.N.K

Dear Janardan, Gratuity calculations explained by Mr. Balaji are statutorily correct; there is no other rate of gratuity other than 4.81% on Basic and DA.

I just posed a counter question only to make you understand that gratuity is a statutorily payable terminal benefit by the employer, requiring no contribution from the employee other than blemishless service. Janardhan has very well explained the percentage of the annual contribution to be apportioned by the employer to the overall C.T.C.

Clarification on Gratuity and Cost to Company

For Mrityunjay's clarification: Whatever expenses, including the proportionate cost of the terminal benefit of gratuity and other social security and welfare measures incurred annually by the employer to keep the employee under his services, would be the Cost to the Company per employee. As per the Payment of Gratuity Act, 1972, gratuity payable on termination of employment is to be calculated at 15 days' last-drawn wages for every year of completed service, subject to a maximum amount of Rs. 10 lakh. So, the notional provision to be made annually in this regard comes to 4.81% of the wages per annum of every employee.

Regards

Understanding Gratuity Calculation in CTC

The gratuity amount is calculated on an actuarial basis. Therefore, to provide an appropriate understanding of the calculation of gratuity as a component of CTC, the forum should be informed about all the components of the CTC along with their respective percentages.

Regards

I am responsible for recruitment. During interviews, when I verify their CTC breakup, I notice variations in percentages for gratuity, such as 4.1%, 4%, and 2.5%. Are these percentages significant in the CTC breakup?

As mentioned by seniors, the gratuity should be 4.81% of the Basic + DA.

Hi, gratuity is calculated on the basic salary. Gratuity payable = (basic + DA) * 15/26 * years of service. Kindly correct me if I am wrong.

Mr. Janardhan & Mr. Umakanthan M.,

Thank you for the clear-cut explanation on the above issue. Please clarify the gratuity amount payable to an employee who has completed 8 years, 7 months, and 12 days. As per my knowledge, we have to pay for 9 years. However, a few have expressed the need for 8 years. Can you or anyone else please let me know the exact amount that has to be paid.

Dear Sir,

Mohan has worked for 8 years in a company, and his basic salary was Rs 25,000/- initially. However, after 6 years, they reduced his basic salary to Rs 18,000/-, although his gross salary remained the same. Now, after 8 years, Mohan has resigned and smoothly handed over his responsibilities.

On what basis salary will he receive his gratuity?

Thank you.

Dear Umakanthan.M,

My question is: if I joined a company in 2012 and at that time they did not have the gratuity benefit, but later in 2017, they implemented a gratuity program in the company. In case I leave the company in 2018, and I was enrolled in the gratuity program from 2017 to 2018, but my total service would be 6 years with the company, will I be eligible to receive the gratuity amount? If yes, then what would be the calculation?

Thank you.

You are entitled to Gratuity from the date of joining until your last working date. The formula for calculating Gratuity is as follows: Your last drawn Basic x 15/26 into the number of working years, i.e., 6 years in your case.

Gratuity is a one-time terminal benefit payable by the employer whose establishment is covered under the Payment of Gratuity Act, 1972, to the employee who has completed a certain minimum number of continuous years of service of blemish-less nature under the same employer. As such, it cannot be a concurrent benefit as long as the employment continues, and it comes to fruition only on its termination, the nature of which is specifically mentioned in the Act. So, by any stretch of imagination, it cannot be paid on a monthly basis either during the currency of employment or after its termination.

Thank you, Umakanthan Sir, for your clarification on gratuity. I just have one question: as per the employer, they are paying gratuity on a monthly basis, and the gratuity amount is showing in the employee's gross salary. Can the employee take any legal action in case of resignation if the employer does not pay the gratuity amount?

Understanding Gratuity Payments

A one-time statutory benefit for industrial employees linked to certain types of termination of their employment, mandated to be paid by the employer in a lump sum, cannot be paid periodically according to his whims and fancies. Law is a subject to be understood and implemented only with reference to the mischief it aims to eradicate and the benefits it intends to confer on the needy at the appropriate phase in their social life. Unfortunately, at times, some people either understand or misunderstand. The case you've narrated is one of the latter category, I think. Additionally, it is a misunderstanding of the concept of C.T.C. Here, the ultimate loser is the employee for the computation of gratuity under the Payment of Gratuity Act, 1972, which is based on the last drawn wages. One may argue that the monthly basis payment clears the eventuality of forfeiture of gratuity in case of dismissal or sudden closure of the undertaking due to losses. That's why the Act provides for compulsory insurance under Section 4-A, and the exercise of forfeiture of gratuity in case of dismissal is strictly governed by the provisions of Section 4(6) as well.

Therefore, it is imperative that the employees of the organization bring it to the notice of the State Chief Labour Commissioner immediately.

Filing a Claim for Gratuity

Coming to the case of the particular employee, well, he can file a claim before the Controlling Authority under the Act, advancing the argument that what was paid along with his monthly emoluments in the name of gratuity was part of the gross wages determined in the contract of employment.

Gratuity Calculation for Mohan and Ashish

There are 2 cases:

1. Mohan has worked for 8 years in a company. His basic salary was Rs. 25,000/-, and after 6 years, they reduced his basic salary to Rs. 18,000/-, though his gross salary remained the same. Now, after 8 years, Mohan has resigned and smoothly handed over his responsibilities. On which basis salary will he get his gratuity?

2. Ashish joined the company in 2014, and the gratuity monthly amount was considered in his CTC. However, he left the job after 3 years. What about his gratuity amount, which was deducted from his monthly salary?

Thank you.

Dear friend,

In Mohan's case, he can claim and get gratuity under the Payment of Gratuity Act only on the sum total of the basic and D.A. drawn by him in the last month of service only. He cannot agitate the issue of reducing his basic after his resignation. The deduction from Ashish's monthly salary towards gratuity is certainly an illegal deduction. He can file a claim in the Labour Court under section 33C-2 of the Industrial Disputes Act, 1947, for recovery of the amount deducted so far.