Gratuity with Monthly Salary: Is It Fair and Legal to Include from Day One?

Can gratuity be paid with the monthly salary, right from the day the employee has joined the company? Can it be a part of monthly compensation? Is it right not to maintain any gratuity fund?

Understanding Gratuity and Its Purpose

Had the poster made any effort to understand the concept and the purpose of gratuity to employees, as well as the objective, scheme, and mandatory requirements of the Payment of Gratuity Act, 1972, I think this question would not have arisen. Gratuity is a terminal benefit for long, blemishless, and continuous service in the same establishment. It becomes payable only on the termination of employment as a lump sum one-time payment.

Gratuity Fund and Insurance

Forming a gratuity fund is optional. However, taking insurance for gratuity is mandatory.

What purpose does it serve if it is paid with the salary on a monthly basis?

Gratuity is a benefit received by an employee for services rendered to an organization. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. An employee receives gratuity when they resign, retire, or are laid off. In case of death or disablement, there is no minimum eligibility period.

How Gratuity is Calculated

The gratuity amount depends upon the tenure of service and the last drawn salary. It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. According to this formula, a time period of over six months or more is considered as one year. This means if you have completed five years and seven months of service, the number of years would be considered as six years for the calculation of gratuity benefit. On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered five years. An employer can, however, give higher gratuity than the amount under the prescribed formula.

Maximum Amount

For government employees, Rs. 20 lakh is the maximum amount that can be paid as gratuity. The Seventh Pay Commission had recommended an increase in the gratuity ceiling to Rs. 20 lakh from the earlier level of Rs. 10 lakh.

Income Tax Treatment of Gratuity

For government employees, the entire amount of gratuity received on retirement or death is currently exempted from income tax. In the case of non-government employees, income tax rules on gratuity are applicable depending on whether employees are covered under the Payment of Gratuity Act, 1972, or not. For non-government employees covered under the Gratuity Act, the income tax exemption on any gratuity received is the least of the following:

- The maximum amount specified by the government, which is currently Rs. 10 lakh
- Last drawn salary X 15/26 X years of service
- Actual gratuity received

For example, the last drawn salary (basic plus DA) of Mr. Ashish is Rs. 60,000 (per month) and he has worked for 25 years. The gratuity according to the formula is Rs. 8.65 lakh, but suppose he has actually received a gratuity of Rs. 12 lakh. So for income tax calculation, Rs. 8.65 lakh will be considered for exemption. Mr. Ashish will pay tax on Rs. 3.35 lakh (Rs. 12 lakh – 8.65 lakh).

One small correction, my dear friend: The ceiling on gratuity for industrial employees coming under the purview of the Payment of Gratuity Act, 1972, also stands enhanced to Rs. 20 lakh with effect from 29-03-2018.

No benefit in paying gratuity with monthly salary. There is no provision in the Act for interim bonuses like in the POB Act.

Varghese Mathew
BIL, PGDPM
9961266966

If the company pays monthly gratuity along with the salary and provides the remaining amount of gratuity (calculated based on the current basic salary) at the time of leaving, it would still be illegal to proceed on a monthly basis.

Regards,
Payal Singh
Sonipat, Haryana.

Gratuity Payment and Monthly Salary

The monthly paid gratuity cannot be set off against the gratuity payable on termination of service. Once the services of an employee come to an end, and if they demand payment of gratuity as per the Act, the same is due and payable in full. There cannot be any adjustment of the already paid amount on this account.