Is It Legal for Companies to Deduct Gratuity and Pension from Your Salary? Seeking Clarity and Guidance

Good Evening Seniors,

Deductions for Gratuity and Pension Fund from Salary

Can a company or manufacturing unit make deductions for GRATUITY/PENSION FUND from salary? If it is deducted from the salary, then which department should the employer deposit it in? Is this legal? From what I know, it's not a part of CTC, but there are some companies that already make deductions for Pension and Gratuity.

When I asked management about this, they told me it's the right way and that we can deduct it. Hence, I want to know what is the correct approach. Please help me with this. Your early action in this regard will be highly appreciated.

Thanks & Regards

Understanding Gratuity and Pension Fund Deductions

Gratuity is an amount that the employer should pay when an employee leaves their establishment after having rendered a service of at least 5 years. It is payable irrespective of service if the employee dies while in service. It is a payment by the employer and not by the employee; therefore, the practice of deducting amounts from the salary of the employee is illegal.

An establishment covered by the Employees Provident Fund will automatically have a Pension Fund contribution by the employer, and that contribution is also a contribution by the employer. The employer cannot recover it from the employee by way of deduction from the salary.

Regards,
Madhu.T.K

A simple one-word answer to your question is a resounding "NO." It is illegal, immoral, and tantamount to theft on the part of the employer. The response provided by Sr. Madhu T.K. is unequivocal.

Warm Regards,
A

Gratuity Calculation for Deceased Employee

Please tell me how an employee's gratuity will be calculated if they die after 4 years of service. Which formula will be applied? Kindly explain with an example.

Regards,
Sarita

Gratuity Calculation Formula

Very simple, the same formula is Gratuity Qualifying salary (normally Basic + DA) divided by 26 (days) multiplied by 15 (days) further multiplied by 4 (years of service).

In case the gratuity fund is linked to LIC's gratuity scheme, then LIC will pay gratuity based on a calculation projected to a service till his superannuation date.

Regards,
Madhu.T.K

Clarification on Gratuity and Pension Deductions

Thank you, Shri Madhu T.K., for your points and clarification regarding the deduction of Gratuity and Pension contributions from employees. Such practices were not commonly heard of earlier. However, nowadays, some Heads of Organizations (who may not be HR personnel) promise Gratuity even before the completion of 5 years to attract candidates. They commit to these promises and then deduct from the salary, ignoring the Gratuity Law. The same situation applies to Pension.

Further, your clarification that the dependent of a deceased employee will receive extra benefits if the gratuity fund is linked to LIC's gratuity scheme is significant. In such cases, LIC will pay gratuity based on a calculation projected to service until the employee's superannuation date, which is valuable information for HR personnel.

Thanks for the contribution, Sir.

Regards,
C. Neyimkhan
21.11.14.