Is Gratuity Mandatory for Employees with Over 5 Years of Service Without Salary Deductions?

Hello friends,

Is it necessary to give gratuity to all the employees who have been with the company for more than 5 years? Provided we don't deduct the amount from the salary.

Regards,
Nidhi

As per the Payment of Gratuity Act, 1972, it is mandatory to give gratuity to all employees who have been serving the company for more than 4 years and 8 months (as a result of a judgment from the Madras High Court), irrespective of whether it has been deducted from the salary or not.

Regards,
Amitava Majumder

Thank you so much for your reply. I want to clear a few doubts:

1. Will it be calculated based on the last salary drawn?
2. If an employee resigns after 12 years, will it be calculated at 15 days per year accordingly?
3. If the employer doesn't provide gratuity, will it create a problem? Are its records to be maintained?

Please reply. Thank you in advance.

Regards,
Nidhi

Dear Nidhi,

Please note the formula for gratuity as follows:

1) Last Basic Drawn/26 * No. of Years of Service * 15

2) Yes, it will be calculated for 15 days.

3) He can go to the labor court if the employer doesn't give the gratuity.

Regards,
Sunny Mahajan

Hi Chander, my query is solved. I just want to know one thing, i.e., in the 1st year when A joined the company, his salary was 6000. Today, after 12 years, his salary is 14000. So now, if he resigns, he will get 14000/26 * 15 days * number of years of service. Management has to provide this; it is compulsory.

Gratuity in CTC Structure

Should gratuity be added to the CTC structure, or does it depend on the company? Please reply.

Regards,
Nidhi

Dear Nidhi, you have got the calculation absolutely right. Yes, it's compulsory for the management to make the payment towards gratuity. If included in the CTC structure, the employee can ask for the portion deducted even though he might not have actually worked for the eligible period. This is a catch point that has to be handled carefully.

Regards,
Amitava

Thank you for the reply. So, the point is if we deduct the gratuity amount and show it in the CTC, the employee can still ask for the money after 2 years when they resign as they are eligible for it. The accumulated money for 2 years is to be given when the employee leaves. Can the employer argue by saying that the employee has not completed 5 years of service, so they cannot receive this money?

Regards,
Nidhi

Dear Nidhi,

Yes, we have to consider the last drawn basic. As per the new amendments of the act, you should not add it in the CTC structure.

Regards,
Leela

Dear Nidhi,

Thank you for the reply. So the point is, if we deduct the gratuity amount and show it in CTC, even the employee can ask for the money after 2 years when he resigns as he is eligible for that. The accumulated 2 years' money is to be given when he leaves. Can the employer argue by saying you have not completed 5 years of service so you cannot get this money?

Regards,
Nidhi

Dear Nidhi,

No, the employer is supposed to pay the employee after having deducted from CTC once he/she quits/resigns from the company. However, there are greedy people who don't want to pay. In this case, if the employee has time to go to the labor court, then he can do so.

Regards,
Prakash

Gratuity is a gesture of appreciation from an employer to an employee for serving a minimum of 5 years as per the applicable act. There is no deduction that will occur for gratuity, unlike other statutory benefits. As per the act, it is mandatory to serve a minimum of five years.

Dear Nidhi,

If the employer shows the gratuity in CTC and deducts the gratuity from salary, in that condition, anybody leaving the service before 5 years can demand the gratuity amount.

Regards,
Anil Sharma
HR Executive

Unlike PF or ESI, there is no deduction or contribution applicable in the case of Gratuity. There is no harm if Gratuity is included in CTC. You can specifically mention in the CTC Sheet that, 'Gratuity will be payable only after completion of 5 years of service, as per the provisions of the Payment of Gratuity Act.'

Clarification on Gratuity Payment

As per the Payment of Gratuity Act, 1972, it is mandatory to give gratuity to all employees who have been serving the company for more than 4 years and 8 months (as a result of a judgment from the Madras High Court), irrespective of whether it has been deducted from the salary or not.

Regards,
Amitava Majumder

It is necessary to give the gratuity amount to the person who has completed his 5-year continuous service. The calculation is done as per the below formula: BASIC + DA (Last Pay drawn) x 15 / 26 x No. OF YEARS WORKED.

Gratuity is to be paid to any employee only if he provides service for a minimum time of five years at a stretch with his employer in the company. The gratuity calculation is done based on the last average remuneration drawn and the time in years served by an employee.

Regards,
Vikas

Dear Nidhi, kindly note the points given below which will help you understand how gratuity is paid in an organization in response to your query.

Firstly, gratuity is a liability to the organization. Therefore, the Finance and Accounts department will calculate the actual liability based on several factors such as the employee's number of years worked, salary growth, attrition, etc., for the year. Based on this, they will make monthly provisions. All these tasks are carried out by the Accounts and Finance teams based on the HR inputs, which we provide them twice a year in our organization.

Addressing Your Points:

- Please note that gratuity payment is mandatory as it is a part of the salary earned by an employee. The actual service should be 4 years, 10 months, and 18 days, as per the Madras High Court judgment 1998 LLR 1072 WP No-2135 of 1987 decided on 12.06.96 (Mettur Beardsell Ltd V/s Regional Labour Commissioner Madras).

- The formula for calculating gratuity is Basic (DA or VDA) x 15 x number of years worked / 26.

1) It will be calculated based on the last salary drawn?
➔ It will be calculated based on the last basic salary + DA + VDA.

2) If an employee resigns after 12 years, will it be calculated at 15 days per year?
➔ Yes, gratuity is calculated at 15 days per year.

3) If the employer fails to provide gratuity, will it create a problem? Its records need to be maintained.
➔ Gratuity is mandatory and must be paid by the employer when the employee resigns, retires, or passes away.

Regards,
Atul

Dear Nidhi, please see the definition of wages; it is only basic + DA. As per the act, you have to maintain nomination forms of all employees in the prescribed format. Also, you have to maintain a declaration form stating who is responsible for gratuity payment. All forms are provided in the act. If you have any problems, please contact me at [Phone Number Removed For Privacy Reasons].

Regards,
Mangesh

Dear Nidhi,

Gratuity will have to be paid to only those employees who have continually served the company for more than 4 years and 8 months. If this is shown in the CTC structure, the employer must mention in writing that gratuity is payable as per the Payment of Gratuity Act, 1972.

[QUOTE=Subha Bandyopadhyay;1176906]

Dear Nidhi, Gratuity will have to be paid to only those employees who have continually served the company for more than 4 years and 8 months. If this is shown in the CTC structure, the employer must mention in writing that Gratuity is payable as per the Payment of Gratuity Act, 1972. Employees may ask for anything, but the HR department will have to handle each and every case carefully.

Dear all, Sunny Mahajan mentioned that one can go to the labour court if the gratuity is not paid. Please note that not all employees fall under the category of "labour." This classification is based on the gross salary earned. Given the current salaries in the IT and other sectors, very few would fall under this category. The labour office will entertain complaints only from employees covered under the definition of "labour." For all others, the remedy lies with the civil court.

Hi Seniors!

One more query related to gratuity: Is the payment of gratuity mandatory for trusts and educational institutions as well?

Regards, Snehal

Dear Seniors,

Thank you very much for all your inputs. I am now clear with it. Atool Singh, Sir, thank you for your detailed explanation.

Thanking you all.

Regards,

Nidhi

There are no deductions in salary for gratuity. It's purely an employer's contribution for the gracious service rendered by the employee to the organization.

I agree with you. I have seen in many companies where they include the gratuity amount in CTC. So the point comes here: if that person leaves after 2 years of service, can they demand the gratuity amount? I think the company cannot argue by saying gratuity can only be given for continuous 5 years of service. Kindly give me your inputs.

Regards,
Nidhi

Regarding CTC, it is clear. So, even if an employee resigns after 7 years in a company and the system in the company includes the gratuity amount in CTC, then the calculation will be done as shown by you. However, if the gratuity amount is not included in CTC, then when they resign after 7 years, it will be entirely calculated based on the last drawn salary/26 * 15 days * number of years of service.

Am I correct in what I have stated?

With best regards,
Nidhi Shah

If the Gratuity component is mentioned in the CTC structure, the company is liable to pay the amount deducted till the date of his employment irrespective of whether the employee has completed 5 years. Denial by the company can lead to legal proceedings where the employee is most likely to be the winner.

Regards,
Amitava

Dear Amitava,

If gratuity is not included in CTC, the company is still liable to pay the gratuity amount. It is mandatory. Certain provisions need to be made beforehand.

Nidhi

Unlike PF & ESI, you do not deduct Gratuity from an employee's payroll. Yes, all employees who have completed 5 years of continuous service will have to be paid Gratuity at the time of their separation from the company.

Vasant Nair Director Karma-HR 09717726667

Clarification on Gratuity and Insurance

Please let me be clear on the following points:

1. Can gratuity be secured/protected by any insurance company?
2. If an employee dies within 6 months after joining, how can we facilitate gratuity?
3. The company will not provide as per the gratuity act, but how can we pay with any coverage under any policy if a person dies during the course of employment?

Thank you.

Regards

Dear Nidhi,

Understanding Gratuity and CTC Calculation

Payment of Gratuity and CTC calculation are two different aspects altogether.

a) While the former is statutory, all eligible employees who leave the company must be paid gratuity as per the provisions of the Payment of Gratuity Act. It is mandatory, and any violation or non-compliance may lead to a penalty or other action by the concerned authority.

b) The company has to make provisions for gratuity in their books and disburse the amount as and when separation takes place.

c) The calculation is:

Basic + DA + (Personal pay, if any) X 15 X N (no. of completed years)
----------------------------------------------------------
26

For calculation, the separated person's last drawn salary components have to be taken into account as per the act.

d) Nowadays, companies enter into agreements with insurance agencies in their gratuity schemes.

With regard to CTC, it is purely an internal calculation for the purpose of arriving at the manpower cost by the company, and it is between the individual and the employer. Just because the CTC component is shown in their CTC, the employee cannot claim it if he/she does not become eligible as per the Payment of Gratuity Act.

I hope the above clarifies your queries.

Thanks & Regards,

Balamurugan Sivaprakasam
Head- HR
ICIL, MM Nagar

According to the Payment of Gratuity Act 1972, an organization with 10 or more employees is required to provide gratuity after five continuous years of service. The gratuity limit is now 10 lakhs. Further queries are welcome.

Regards,
Kunal Pratap

• Unlike PF or ESI, there is no deduction or contribution applicable in the case of Gratuity.
• There is no harm if Gratuity is included in CTC. You can specifically mention in the CTC Sheet that, 'Gratuity will be payable only after completion of 5 years of service, as per the provisions of the Payment of Gratuity Act.'

Hi friends! I have a few questions myself. An employee was engaged on a contract basis for 3 years and continued to work with the company after the completion of the contractual period. The management did not renew his contract but continued to pay him a monthly salary. Now, he has completed almost 8 years continuously on the first contract agreement with an enhanced basic salary from time to time.

My Questions:

1. Is he eligible for gratuity as per the Payment of Gratuity Act?
2. As the contract was not renewed but the management utilized his services and also gave yearly increments in the basic pay, will he be treated as a regular employee?

Thanks for your guidance.

Regards,
Radhangapani

Dear Nidhi,

Why are you so keen on saving the company's money by taking away the gratuity of the employee, which happens to be his legal right? Be a true HR.

Hi All, I need the following Gratuity info for Tamil Nadu:

Gratuity Deductions and Contributions

1. How much amount is monthly deducted from the employee?
2. How much amount is contributed monthly by the employer?

Gratuity Deposit and Contact Information

3. Where should the amount be deposited? Is there a specific office contact?

Handling Past Deductions

4. If the amount was not deducted previously, can the old + new amounts be deducted from the employee?

Exclusion from LWF

5. Are employees working in managerial or supervisory roles and earning wages exceeding Rs. 3,500/- (Rupees Three Thousand Five Hundred) per month excluded from LWF?

Thanks,
R. Chandrasekar

As per the law, an employee is eligible for gratuity if they have rendered 5 years of continuous, unblemished service for the organization, whether it is mentioned in the CTC or not.

Gratuity and Company Policies

Nowadays, companies have tie-ups with insurance companies for the payment of gratuity, so they intend to include it in the CTC. Once it is included in the CTC, the employee is eligible for gratuity once they resign from service, irrespective of the service period.

Hi dear Friends! I think it will take some time to respond to my query! However, let me give my views on the point I raised, and correct me if I am wrong in my assessment. I would like to get feedback as it relates to one employee's rights and also help employers formulate guidelines when people are engaged on a contractual basis.

Firstly, the employee, after completing the contract period, should naturally ask for a renewal of his contract period in writing before he continues his services with the Company. In case he did not do so but the company also did not issue the same and engaged his services, it may be presumed that a mutual understanding between them exists and he is now a part of the company regulars. Here we need to note, the management not only engaged his services but also gave increments to his basic pay from time to time, thus establishing a continuous employer-employee relationship.

So, after 8 years of service, if for some reason, the employee wishes to leave or the employer wants to dismiss the employee from services, the employer is bound to pay the gratuity as well as all other benefits other regular employees enjoy, irrespective of the fact that he was originally engaged on a contract basis.

Please consider and post your opinions. In fact, I want an expert's advice if one of you also handles the legal adviser duties.

Thank you,

Radhangapani

Hi Nidhi,

Whatever I know about gratuity is that it is the last month's salary drawn by the employee divided by 2 and multiplied by the number of years completed by the employee. So when I put this amount in your formula, I did not get the same amount.

Please reply.

Best regards,
Shashi

• There is no deduction or contribution involved in Gratuity. Please go through the information already posted in this thread before posting queries. Your query is already answered in the post. Please read.