Can Employers Legally Deduct Gratuity from Monthly Salaries? Seeking Clarity on the Act

Please advise: Can the employer deduct gratuity from employees' salaries every month? Is this allowed under the act?

Employer is not authorized to deduct any amount from employee pay on account of gratuity. The employer has to cater for likely gratuity payments to employees as per their entitlement as and when due. They can take out an LIC policy or obtain coverage from another insurance company to fulfill due amounts to entitled employees. However, deducting any amount from an employee on account of gratuity is illegal.

Dear colleague,

It is outright illegal to make deductions from employees' salaries when the responsibility squarely falls on the employer to pay them when due and eligible, either from their own funds or through linkage with LIC. I urge you to make a representation to the top person and bring to their attention this grave violation of legal obligations. Kindly request them to refrain from this practice and also to refund any amounts that have already been illegally deducted.

Regards,
Vinayak Nagarkar
HR Consultant

Dear Contributors,

To clarify, an employer cannot deduct gratuity contributions from the employee's earnings; however, showing the gratuity component as a separate element (benefits) to compute the Total Cost to the Company (TCTC) is a legitimate practice adopted by most companies. There is no logic to it; it is just like adding froth to beer, inflating the total compensation by including benefits such as gratuity, insurance, etc., to make it appear more attractive.

Regards, Rahul Chhabra

Dear Colleagues,

Gratuity does form part of CTC, which is understandable. If the legal responsibility is put on the employer, where is the need for either deduction or notionally showing it as a debit and credit? It is forthright ridiculous.

Regards,
Vinayak Nagarkar
HR Consultant

Under the Payment of Gratuity Act 1972, the payment of gratuity is the responsibility of the employer, and there is no contribution required from the employee.

Employers cannot deduct from the employee. Insurance can be taken to hand over the burden, which is the wise way to manage it. I generally advise the employer to do so.

Brij Pathak
Manager HR

Kindly check, is it CTC or Gross Salary? Gratuity is part of CTC.

Please let me know if you need further assistance.

Reasons Against Including Gratuity in CTC

It is improper to show the gratuity amount as a part of CTC for the following reasons:

1. There is no monthly outgo payment towards gratuity for any employee.

2. Gratuity is payable after 5 years of continuous service based on the last drawn salary. Therefore, how can the employer project the CTC amount based on the current running salary?

3. If an employer includes the gratuity contribution as part of the salary (CTC), then it should be paid to the employee upon separation before the completion of 5 years of service. The contribution shown as part of CTC is not payable by the employer to the gratuity fund.

4. Companies benefit from tax advantages on the accrued gratuity amount.

5. In contrast to PF and ESI contributions, which are monthly outgo payments from eligible employees from the beginning, the gratuity amount does not need to be paid to the Trust or LIC every month. Therefore, displaying the gratuity amount as part of the CTC in employees' offers or appraisals is not justified.

Regards, Suresh

Dear Colleagues,

Since gratuity is a cost to the company and a legal obligation, it is perfectly alright to show it as a part of CTC just like PF and ESI. There may not be a monthly outgo, but funding provisions have to be made in the books of accounts for its future liability.

However, what is condemnable is the deduction by the employer towards gratuity from employees' salary every month. It is illegal, and if it is not stopped forthwith, the employer should be brought before the authorities for a serious breach of the law and a punishable offense.

Regards, Vinayak Nagarkar
HR Consultant

Dear Hemlata, there are many opinions on your query. Let us understand the mathematics behind TCTC/CTC.

Understanding TCTC/CTC Calculation

Let us consider the TCTC/CTC per annum is INR 3,60,000/- i.e., per month INR 30,000/-. Let us also consider the components included in CTC are - (Basic, HRA, Allowances = Monthly gross) + Employer's portion of PF & ESI (if applicable) + Statutory Bonus (if applicable) + Gratuity + Any other payment proposed to pay the employee.

Therefore, to arrive at the monthly gross, it is essential to deduct other components, i.e., from 30,000/- it will be required to deduct Employer's portion of PF & ESI, Statutory Bonus, Gratuity & Any other payment.

Arriving at Basic, HRA & Allowances

When we offer employment, nowadays most employers are showing TCTC/CTC. There are organizations that process payroll from CTC, which is technically wrong. Offering CTC is one part, but when we process payroll, it should be from the monthly gross; otherwise, confusion will continue.

The offer of the organization may be (Basic + HRA + Allowances = Monthly gross) * 12 = Yearly gross + Yearly Employer's contribution to PF & ESI + Yearly Statutory Bonus + Yearly Gratuity Liability + Yearly any other liability. Payroll will be on the basis of monthly gross only.

Trust this will satisfy your query. For further clarification, you may contact me.

Thanks & Regards,
S K Bandyopadhyay (Howrah, WB)
[Email Removed For Privacy Reasons]

Hi,

Yes, it is legal. Gratuity is a part of CTC (Cost to Company). A few companies have a Gratuity fund with banks where they deposit gratuity for all employees. Gratuity can be deducted from an employee's CTC but not gross salary. Most companies nowadays prefer keeping everything in CTC so they know their total cost involved with an employee.

Hope this helps.

Regards,
Shweta Gehlot

In simplified terms, gratuity should be paid (borne) by the employer/business owner/company/organization. It should be a cost to the company (employer) and should not be a cost to the employee.

Mohan Nair.

Dear colleagues,

Those forum members who have opined about gratuity being part of CTC are missing the core point of the query. The issue is the employer has deducted from the salary of the employees an amount towards the gratuity, and the query is posed whether this is alright as per the Gratuity Act. Myself and several others have categorically stated that this is illegal.

Regards,
Vinayak Nagarkar
HR Consultant

Dear Mr. Vinayak, request you to read my earlier posting properly. Gratuity being a part of CTC/TCTC or not is not the problem because CTC/TCTC has no legal standing.

The problem of processing payroll

If any organization starts processing payroll and shows it on the payslip from the monthly CTC/TCTC level and then deducts the items included in CTC along with Gratuity, it will be a technical problem to convince any statutory authority. CTC is an internal matter of the organization. If the same organization processes payroll from the monthly gross after internally adjusting all deductions from CTC, including Gratuity, then the question of deducting Gratuity from salary will not arise.

Trust this will satisfy your query.

Thanks & Regds.,
S K Bandyopadhyay

[Email Removed For Privacy Reasons]

No employer is not authorized to deduct any amount from an employee's pay on account of gratuity.

No such provision in the Act. Employers' liability should not be deducted from employees' salary/wages. Furthermore, employers' liabilities such as ESI, PF, Gratuity, etc., are not to be treated as wages. You may refer to the Payment of Wages Act.

Gratuity Deduction from Wages

No, an employer can't deduct gratuity from wages, as it's the total employer's responsibility to pay gratuity at the time of separation after 4 years and 240 days or in case of death at any time during the service period.

Misconceptions About Including Gratuity in CTC

According to some friends, it's correct to include it in CTC. They are misleading other members because, for the first year, if an employee's basic is 12,000, then his gratuity contribution becomes 573.00. The following year, if his basic is revised to 13,500, then the gratuity becomes 650.00. This increment continues until the fourth year, possibly reaching 820. Now, if the employee leaves after five years and eight months when his basic is 20,000, his gratuity calculation should be based on 962 on a monthly basis for five years, which translates to 68 months. The total amount would be 68*962=65,416.00, not as per the fixed CTC calculation.

Therefore, it is the HR's duty to guide their employer in the correct direction.

So don't include gratuity in CTC; it can be calculated after the service separation only.

Gratuity Calculation Clarification

The calculation as shown above is incorrect. If any employee worked for 5 years and 8 months, i.e., 68 months, and his last drawn basic is 20,000/- per month, then his gratuity amount will be (20000/26) * 15 * 6 = 69,231/-.

Investment of Gratuity Deductions

Secondly, the consideration that has been made, that the money deducted from CTC every month will not be invested properly, is not right. Either the money will be invested in any insurance or managed by the Gratuity trustee formed by the company.

Gratuity as Part of CTC

Whether Gratuity should be part of CTC or not is the organization's own policy as there are no legal bindings. If it is not part of CTC, the question does not arise to deduct gratuity from salary - it is illegal. But if it is part of CTC, it has to be managed professionally; otherwise, it will also create a problem.

Regards, S K Bandyopadhyay

[Email Removed For Privacy Reasons]

Employers are not authorized to deduct any amount from an employee's pay on account of gratuity. An employer has no right to cut it from his or her salary.

Any deduction that is not in line with the Payment of Wages Act is illegal. Furthermore, the employer does not have the legal right to deduct gratuity from their employees. In case there is any agreement to this effect, it will be voidable at the instance of the employee and by Court's order.

If your employer is deducting the gratuity amount every month, please ensure that those deductions are reflected in your pay-slip or obtain receipts. Otherwise, it may be challenging to prove in a Court of law.

From the PAYSLIP you have provided, it is not evident that they have deducted any statutory deductions from your monthly gross salary, which is your actual salary to appear on the PAYSLIP. To arrive at the net pay, they have deducted only the PF contribution (employee's share) from the monthly salary (Monthly Salary Rs. 28,519.00 Less PF Rs. 2,053.00 Net Pay Rs. 26,466.00). They have provided other benefits on a yearly basis like PF, Gratuity, Leave, Bonus, and Medical Insurance to arrive at the Cost to Company (CTC).

If during the negotiations you accepted 4,00,000 as CTC, then the breakup seems to be correct except for any mathematical mistakes. If you understood Rs. 4,00,000 as your yearly salary (Monthly salary Rs. 33,333/-) and if the employers offered you Rs. 4,00,000 as yearly gross CTC, then there is a misunderstanding.

Regards, M.A. KULKARNI

Hi All,

Could you please advise whether gratuity is considered from the joining date of the company or the post-confirmation date (which is 3 or 6 months after joining)? Or does it depend on the company's policy as to which one should be considered?

Regards,
Amit

I worked in an IT company from 18/06/2013 to 10/12/2018. Monthly gratuity was deducted (4.81% of Basic) from my salary as per my attached salary slip. I worked more than 80 holidays (Sundays and Government holidays) during my service, and I received extra salaries/leave for these additional working days in the corresponding month. I have claimed my gratuity after my relieving, and they are releasing a 5-yearly gratuity to me.

Queries regarding gratuity eligibility and deductions

I have some queries and would appreciate your suggestions:

1. Am I eligible for 6 years of gratuity as I worked more than 6 and a half years, including holidays worked?
2. Can I claim the gratuity that was deducted from my monthly salary?

Thank you.

If it is part of CTC, the employer can deduct gratuity and pay after completion of 5 years of service. However, if it is not part of CTC, the employer cannot deduct.

Dear Colleague,

Whether part or no part of CTC, there is no question of any deduction from salary on account of gratuity. It is legally mandatory that the employer creates a fund for it and pays eligible employees. It is not contributory in nature, unlike PF and ESI. It would be illegal if the employer makes any deduction for gratuity from employees' salary and is liable for prosecution for the same. No misleading advice, please.

Regards,
Vinayak Nagarkar
HR Consultant

Offer Letter Example

There are several opinions from different experts. Let me share with you one offer letter example:

YRLY Basic - 2,40,000
HRA - 1,20,000
Allowance - 60,000
YRLY GROSS - 4,20,000
EMPLR PF (13%) - 31,200
GRATUITY - 11,538
BONUS - 7,000
INSURANCE - 5,000
CTC - 4,74,738

Payroll/Payslip

Earnings
BASIC - 20,000/-
HRA - 10,000/-
ALLOWANCE - 5,000/-
MONTHLY GROSS - 35,000/-

Deductions
PF - 2,400/-
PTAX - 200/-
TDS - 500/- (SAY)
TOTAL DEDUCTIONS - 3,100/-
NET SALARY - 31,900/-

The above is a clear indication that the offer letter is based on CTC, but the payroll/payslip is different. There is nothing wrong with it. It is a problem with those organizations that process payroll from CTC through their software and show all deductions on the payslip.

In the above example, the organization will manage the Gratuity Fund through insurance or by its own trustee, and the Bonus as per the Payment of Bonus Act will be paid once a year on time. I have observed the same with some MNCs and good Indian organizations.

Thanks & Regards,
S K Bandyopadhyay (WB, HOWRAH)

Employer's Responsibility for Gratuity Payment

In my opinion, an employer cannot deduct the gratuity amount from wages, as it is the total responsibility of the employer to pay gratuity at the time of full and final settlement after the completion of 5 years of service. It is a direct retirement or superannuation benefit that must be given by the employer, but it is compulsory to complete 5 years of service.

Gratuity Payment Process

Generally, this is paid by taking group gratuity schemes by the insurance companies, for example, the LIC group gratuity scheme. The employer has to submit a yearly working report of employees with their date of birth, date of joining, and salary details to the insurance company. After resignation, the employer can apply for the gratuity amount from the insurance company with supporting documents such as the resignation letter and employee record.

Legally, there is no provision to deduct gratuity from an employee.

The CTC concept is administrative in nature and cannot override legal provisions. Gratuity is an employer liability, and they need to account for it as a business expense.

Considering a Group Gratuity policy might be a viable option.

Kindly guide, if any employee from a private organization leaves the job after 3 years, is he eligible for gratuity amount? The amount is shown as part of CTC in the appointment letter. As per the rule, if it is due to him after 5 years, what about the amount shown in the letter? How will the employee benefit from it?

Understanding CTC and Its Implications

Those who are eligible to understand CTC and can comprehend it should know that showing deductions in CTC is totally fraudulent. As the name suggests, how can you decide before the period? It is fraud against the employee and their future job prospects. Such employers just show high figures and end up paying less in order to attract applicants and deceive new hires.

I urge all of you not to engage in this practice at your workplace and never support such manipulative tactics with employees because one works hard to earn, and someone needs to support their family. Although CTC is not defined anywhere in Indian law, it is important to be aware of fake employers.

Thanks,

Dear Seniors,

If someone had joined an organization on 1/3/2014 and left on 28/2/2019, are they eligible for the payment of gratuity or not? Please advise.

Regards,
P.K. Singh

Dear Hemlata,

Please refer to your offer letter containing the annexure of CTC structure. If it is stated and you have provided a signed copy of the same to your HR department, then they have the right to deduct the amount from your salary.

Regards

Dear colleague,

This utterly wrong view which disregards the employer's legal responsibility to bear the cost of the Gratuity. Any deduction from the monthly gross salary on account of gratuity is illegal.

Regards,
Vinayak Nagarkar
HR Consultant

As per my understanding, there is no harm in deducting the gratuity amount from CTC with the following conditions:

1. In case an employee leaves the company before completing 5 years as per the Gratuity Act, then the employee is entitled to receive the amount which was deducted from the CTC.

2. If an employee leaves the company after 5 years, then as per the statute, they will receive their payment.

I don't feel any violation of the law.

Gratuity Deduction from Employee Salary

The answer is NO. Gratuity is a part of the salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job.

However, many organizations declare the gratuity amount as part of the CTC so that they can show a higher CTC given to the employee. If it is part of the CTC, it should be paid to the employee even if he leaves the job before the completion of 5 years.

Regards,
Mayan Rajput
Aurangabad

Calculation Format of Gratuity

The calculation format of gratuity varies depending on the country's labor laws and company policies. In general, gratuity is calculated based on the employee's last drawn salary and the number of years of service completed with the employer. It is usually calculated as a certain number of days' salary for each year of service.

For example, in some countries, the gratuity amount is calculated as 15 days' salary for each year of service. So, if an employee worked for 5 years and their last drawn salary was $5000 per month, the gratuity amount would be calculated as follows:

Gratuity = (15/30) x $5000 x 5 years = $12,500

Employers need to be aware of the specific rules and regulations regarding gratuity calculations in their jurisdiction to ensure compliance with the law and fair treatment of employees.

Dear Hemlata,

An employer is not entitled to deduct the gratuity from the employee's gross salary. It is a part of the CTC structure, and the deduction can be made from their CTC. Employers also take out some form of LIC for this and make provisions in their books of accounts for gratuity.

Thank you.

Dear Hmlata,

An employer has no right to deduct gratuity from an employee's salary. It could be shown in your salary breakup, which would be part of your Cost to Company (CTC).

In other words, your CTC reflects the total amount the company is investing in you as an employee.

Thank you.

Dear sir,

Please let me know, what is the salary meaning for gratuity calculation? Are there any changes after the passing of the Wage Code Bill, 2019?