How Will the New Gratuity Ceiling Affect Employee Salaries and Employer Liabilities?

Dear Folks, as you are all aware, the government has revised the 'Gratuity Ceiling in Private Sector' from 10 Lacs to 20 Lacs. I am reaching out to you all to gather your perspectives and discuss ways to deal with the impacts on employees and employers.

Scenario:

- In the private sector, the practice is that 4.81% of the basic salary from the employee's CTC is contributed to the Gratuity Fund.

a) What implications will this have on the employer and employee?

b) Will this affect the employee's 'Salary'? If yes, how?

c) If there is any liability on the company, what will it be and how will it impact them?

d) To address the revision in the Gratuity ceiling, what provisions should the employer be implementing?

Please share your valuable insights.

Regards, Shivam

Dear JudeGR,

Thank you for sharing your thoughts. Could you please be a little more elaborate?

Earlier, it was 10 lakhs, and now it is 20 lakhs. Does that mean:

a) Taxable gratuity was applicable after 10 lakhs, and now 'No Tax Till 20 lakhs' is in effect?

b) If an employee can receive gratuity beyond 10 lakhs, how will the private company increase their gratuity fund? Currently, in the private industry, 4.81% of the basic salary is deducted from the employee's salary. Will this lead to more deductions from the employee?

Please share your thoughts.

Dear Shivam, one need not emphasize the solace provided by the triple terminal benefits, namely Provident Fund, Pension, and Gratuity, to the working classes in the organized sector when they become obsolete and infirm with the advancement of the inevitable aging process. Particularly, in the absence of equitable social security measures for all citizens by the Welfare State, such post-retirement benefits for the working class, who contributed to the economy of society when they were productive and eventually become no longer productive with age, are more based on the doctrine of egalitarianism rather than the profits and losses of enterprises.

In this backdrop, let me answer your queries as follows:

There has not been any change in the scenario of the rate of contribution to the Gratuity Fund in the Industrial Sector or the financial commitment of the Governments regarding their employees.

a) With the hike in the existing ceiling to Rs. 20 lakh, employees stand to receive more without income tax deductions. Although the employer has to pay more, it is covered by the insurance taken by them under section 4-A of the Payment of Gratuity Act, 1972. Therefore, it does not impose any additional financial burden on them. The gratuity ceiling has already been raised to Rs. 20 lakh with the implementation of the Seventh Pay Commission Recommendations for Central Govt Employees, followed by all State Governments, bringing harmony between Government service and industrial employment.

b) In my opinion, employee loyalty to their establishment will increase, reducing employee turnover as all paid employees are eligible for gratuity. Employers, on the other hand, may tend to subscribe more to the Gratuity Insurance Scheme.

c) I don't believe it will have any impact on the salary of employees as there is no change in the existing rate of calculation of gratuity. The specific portion of the CTC remains the same, and the impact is to be absorbed by the insurer only.

d) This amendment only reduces the concession on the maximum amount of gratuity actually payable available to the employer. Therefore, no additional effort is required on the part of the employer.

Kind regards, [Your Name]

Dear Shivam,

a) Yes.
b) No change in anything. 20L shall be achieved based on the last drawn basic and the number of years in service. The more the basic, the more the number of years in service, which equals more gratuity. The rate of 4.81% on basic stands until further notice.

Thank you.

Gratuity Contributions in the Private Sector

In private sector practice, 4.81% of the basic amount from an employee's CTC is contributed to the Gratuity Fund. This calculation is used to determine the employer's liability towards gratuity and does not impact the employee in any way.

Implications for Employer and Employee

a) What implications will this have on the employer and employee? This will be beneficial for the employee.

Impact on Employee's Salary

b) Will this impact the employee's 'Salary'? If yes, how will it? There will be no impact on the salary as gratuity is paid upon separation or retirement according to the established rules.

Company Liability and Impact

c) If there is any liability on the company, what impact will it have? The company will need to bear the increased load of gratuity and may consider joining group gratuity schemes.

Provisions for Gratuity Ceiling Revision

d) To adjust to the revision in the Gratuity ceiling, what provisions should the employer make? Employers should consider taking out suitable insurance policies to manage the higher outlay for gratuity.

The government must be commended for making pro-employee decisions that greatly contribute to ensuring financial stability at the time of retirement.

There is provision for taking insurance to pay gratuity, which may be explored. This ensures that employees receive their due, and employers are covered from sudden cash outflows. It will also cover gratuity to be paid to employees who die in service.

Col. Suresh Rathi