Curious About Gratuity: Does the Employer Really Pay 4.85% of Basic Salary Monthly?

I have one doubt about the Payment of Gratuity Act. I heard that the employer will pay 4.85% of the basic salary of every employee towards a gratuity fund every month. Is it right? Is there any provision like this in the Gratuity Act? Please clarify for me.

Dear Prasad,

The Payment of Gratuity Act is a small act with hardly 15 sections. A reading of the bare act would enlighten you. If you are in HR, knowledge of the act and rules is a must for you. And if you are an employee, then what is your entitlement and terms and conditions should be known to you.

Dear Prasad,

Making provisions internally or taking a policy from LIC, which covers and pays gratuity claims, is the decision of your management. In the case of LIC, you just have to pay the premium, and LIC will be liable to pay the gratuity to the employee. If you make an internal provision, you have to clear the gratuity claims.

Dear Colleague,

The funding of gratuity with LIC is left to the company, and contribution to it is governed by the scheme. The payment of gratuity to eligible employees is governed by the Payment of Gratuity Act. You are perhaps mixing contribution to LIC gratuity fund with the rate of gratuity payment under the Act. These are two different things.

Regards,
Vinayak Nagarkar
HR Consultant

I would like to respond to the queries in my way. The queries asked a question: is there any provision like this in the Gratuity Act, i.e., paying 4.85% by the employer on the basic salary of every employee towards a gratuity fund for every month? There is no such provision in the Gratuity Act. The Act states that the employer is liable to pay gratuity to an employee who leaves on completion of 5 years of continuous service at the rate of 15 days for every year completed.

When you pay gratuity at the rate of 15 days for every year completed, the cost of this comes to 4.85% of the basic salary.

It is very unfortunate that HR professionals have no grip over the subject matter they handle. I am very sorry to say it.