Understanding Gratuity and ESI: What Are the Rules for Salary Deductions?

Gratuity

1. Is it mandatory for a company to provide gratuity? If yes, should we register with a Government office like an employer PF account?
2. Should the employee contribute from their gross salary for gratuity?
3. If yes, on what basis should we deduct the amount from their salary?

ESI

1. If the basic is >6500, is it mandatory to consider only the maximum PF contribution of Rs. 780, or can we calculate basic*12% for PF? Is this a rule laid by the Government?
2. If we exceed that limit, is it taxable?
3. Is it compulsory for an employer to split the 12% into 8.33% for the Pension Fund and 3.67% for the Provident Fund?
4. Which employers should split it?

Thanks and Regards,
R.S. Suhasini

Gratuity is mandatory and applicable as per the "Payment of Gratuity Act." It can be part of CTC for calculation purposes only, with no deduction from salary. ESI is applicable up to Rs 15,000/- gross salary, while the PF limit has increased from Rs 6500/- to Rs 15000/-. PF rules are set by the Government, and PF itself is not taxable.

If the employer's share exceeds 12% of basic+DA, any additional PF share by the employer is taxable. It is a rule that the employer's PF share should split 12% into 8.33% for the Pension Fund and 3.67% for the Provident Fund. All employers are required to split the PF share in their return.

Thank you.

Gratuity is mandatory if an employee completes five years of continuous service in a company. An employee need not contribute anything for gratuity; it is a liability for the employer only. There is no need to do any registration for gratuity. However, it needs to be valued by a certified valuer, and the certified value is to be provided in the books of accounts as per accounting standards.

Be clear in your query. You have given the heading as ESI, but your queries are related to PF. Nonetheless, PF is being administered under the Provident Fund and Miscellaneous Provisions Act of the Central Government. All employers, regardless of their status, are required to split their contribution into two parts as EPF and FPF. An employee can contribute more than 12%, but it is sufficient if the employer contributes 12%. PF is not taxable as it is only a deduction from one's salary.

The company has to pay the gratuity when the employee is leaving the job after putting in a minimum of 5 years of continuous service. The employee need not contribute anything. However, the employer has to take the current basic pay + dearness allowance (without other allowances) for calculation, multiplied by the number of years, multiplied by 15, divided by 26. The maximum limit is Rs. 10.00 lakhs per employee.

Secondly, the limit for ESI has been increased up to Rs. 15,000/-. The employer has to pay from their contribution at 12%, as you mentioned. While preparing the challan, this should be noted. There are no specific stipulations for employers.

Regards,
B. Sekar

As I am not tagging the writings here, I didn’t do the same.

Thank you for all the replies. It would be great if you could reply to my other queries. I have gone through many of the forum discussions, but those details were not exactly as needed for me. If a company mentions a medical allowance maximum of 800 per month in a payslip, can they also deduct ESI?

Staying Updated on PF, ESI, Gratuity, IT, and Professional Tax

How can we stay updated about PF, ESI, Gratuity, IT, Professional Tax, and other details whenever the government makes changes to their limitations? For example, for PF considerations, the basic salary limitation is 15,000, whereas previously it was 6,500.

Professional Tax Calculation

On what basis does professional tax have to be calculated and deducted from salary?

Please provide me with details about Superannuation.

Hi @Chith, you have provided the formula for gratuity to calculate the final amount to be disbursed for the candidate after he/she is relieved from the company. However, I need the formula for gratuity to calculate how much the company spends on a monthly basis to show in the salary structure when offering to the candidate. It would be very useful for me if you could provide it.

Thanks in advance.