Are Employers Taxed on Gratuity Deductions from Employee CTC? Let's Discuss

Hi, are employers taxed on any gratuity amounts deducted from an employee's CTC? Thank you in advance.

Clarification on Gratuity and CTC

What do you want to ask or convey? Is it whether gratuity can be deducted from the total cost to the company or not? Or whether the amount of gratuity shown in the CTC is taxable or not?

First, there is no such concept called CTC in the eyes of the law. Second, no employer will "deduct" gratuity from the remuneration payable to an employee, even though an amount is shown as gratuity as payable at the time of exit subject to some conditions. Third, the amount so mentioned is an amount after all the fixed payments are shown as included in the gross salary, and the same is not reflected anywhere in the Form 16 issued by any employer.

Hi Sumanth,

As Mr. Madhu stated, you should clearly understand the concept of CTC, gratuity, and the tax thereon. Briefly:

1. CTC is not recognized under the Income Tax Act.
2. Since the '90s, after IT gained momentum in India, employers popularized CTC among job seekers to make their offers attractive. The CTC is divided into two parts:

i) Emoluments included in the 'gross salary' as per your 'pay slip' such as basic, DA-FDA/VDA, HRA, conveyance, and other allowances. After deductions like EPF, Prof. Tax, TDS, installments of advances, and other recognized recoveries, it arrives at 'Net salary payable,' which is your 'take-home pay' and gets credited to one's bank account monthly. And part-2 -

ii) Other employee-related costs which are not paid upfront monthly but become due for payment as and when due/payable. These components are generally known as 'non-cash (employee-related) costs' to the employer. They include:

(a) Employer's matching contribution to employees' EPF/EPS/ESI account
(b) Leave salary - i.e., normally salary is paid monthly when employees avail any approved leave, but a certain amount of leave is encashed either during the service or when separated.
(c) Gratuity - employer's contribution to the gratuity fund/LIC or any other approved funds. Though gratuity is not paid in cash monthly to the employees, as per accounting norms, the liability to gratuity on an accrual basis annually has to be accounted for every year.
(d) Premium payable for and on behalf of employees towards 'mediclaim insurance,' if any, etc.

Please understand that while Part-i is paid to employees monthly, Part-ii components are not paid monthly but are accounted for monthly or annually as due by employers concerned.

As you may know, 'gratuity' is payable to the employee leaving the employment only after 5 years of continuous service. However, no income tax is deducted thereon except when the sum of gratuity, as and when paid to the employees concerned, exceeds the maximum limits prescribed under TDS under the Income Tax Act. No tax is deducted from employers on gratuity thus paid by them.