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Right to gratuity amount deducted from employee's ctc

manmohan khetan (CA, service) (14 Points)

22 August 2012

Gross CTC of employee as per appointment letter is 20 lacs p.a.. This amount of 20 lacs is broken up in Basic Salary / HRA & Gratuity amount.

From 20 lacs Rs. 50,000/- is deducted for Gratuity and net amount of CTC Rs.19.5 Lacs is paid to employee under different heads over a period of 12 months.

Practice followed by employer is they pay Gratuity amount to employees who complete five years & more of services. Till then annual amount is deducted from annual CTC. If employee leaves before completing five years of servuice, employer eats away all deductions made from annual CTC towards Gratuity

Now employee complete four years and resigns from the company.

My querry is can employee claim refund of Rs.2 Lacs (50,000 X 4) from the employer

Manmohan Khetan

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6 Replies

Mihir (Wealth Manager) (5293 Points)
Replied 22 August 2012

Strange ! Gratuity amount is not to be deducted from the employee's salary. It is a gratituous gift from the employer to the employee for completing 5 years of continuous service and no amount from the salary is to be deducted for gratuity. Every year, the company has to create a liability, a provision for payment of gratuity. In some companys, they assign the allocation of gratuity in the hands of a insurance company. But nowhere the gratuity amount comes from the pocket of the employee.

In your case, the employee is entitled to get back the gratuity amount. The company can't talk about 5 years crap because the company is not suppose to deduct gratuity from the salary in the first place.

The employee should keep an advocate on stand-by in case the company gives any excuses and does not refund the amount within 30 days.

Kolluru Krishna Murty (Partner) (315 Points)
Replied 05 October 2012

Dear,

The matter got confused.

No where employer committed that Rs 50,000/p.a.is payable to the employee.

the letter only says Rs 20 lacs is Cost To Company and that is shown how it gets distributed.

There can be no claim on employer unless there is a specific committment in the letter that it would be paid before copletion of 5 years.

kkm

Raj Jha (Company Secretary) (33 Points)
Replied 13 February 2015

I am facing similar problem. If there is any case law on this please share.

Komal Tiwari Pandey (CS) (492 Points)
Replied 14 August 2017

Sir,

Can you refr some case study as in our company also the same thing is about to happen and being a legal person I want to present the same to the management

Tikaram Chaudhary (Founder of Gratuity Trust Fund Consultant) (2187 Points)
Replied 22 February 2019

Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit of his exit from the company.

(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, -

(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement:

Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. The cost is to be born by the Company and not an employee, hence Gratuity cannot be a part of CTC.

To understand this part, let us take an Example,

Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Gratuity Components is not a part of CTC. Assuming that the Expected Salary Increase in Basic Salary is assumed to be 10% p.a.
Now Gratuity Payments for the next 5 years will be:-

On Completion of 1 Yr - (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs - (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs - (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs - (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs - (15/26)*41,873*5 = 1,20,788/-

Now for making the payment of gratuity, Company has 2 options :

(i) **“Pay as you go option” **- Where the company makes a provision of Gratuity in the Balance Sheet on the accrual basis taking an actuarial report on BS date from an Actuary and as and when Mr. A leaves the organization, company pay gratuity from their **resources** and get the tax benefit for the gratuity paid.

(ii) **“Funding Option”** - In this option, the Company decides to Setup an Approved Gratuity Trust. The Investment of the Company is either "Self Managed" or “ Managed by Insurance Company”. Company contribute the annual contribution in this Gratuity Trust and get the Tax Benefits. In this case, when Mr. A will leave the company, gratuity will be to Mr. A from the Gratuity Trust.

In both above cases, Gratuity is paid by the Employer from his** own resource.**

In case you need more clarification in the above matter then you may visit my blog at (https://www.gratuityconsultant.blogspot.com)

Nitin H (Private) (29 Points)
Replied 07 August 2022

For any assistance required with respect to Gratuity trust, superannuation trusts or any employee benefit schemes, do connect on below mentioned email id a1consultancyservices @ yahoo.com. We are a 9 year old firm entrusted by many indian and multi national companies, we are specializing in the field of corporate employee benefits.