Gratuity

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 July 2010 Experts,
1)Is gratuity deducted on a monthly basis from employees salary?
2)If 1 above is yes @ what rate? & on what amt(basic+da+hra)??
3)Is it deposited into treasury by the company?
4)which is the deposit form no.?
5)what is gratuity trust/fund?
6)how frequently gratuity returns are filed??

i've read the calc for gratuity payable and that is all I know.

thnx

Sunil Kr. Sanganeria

Sunil Kr. Sanganeria (Expert)
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12 July 2010 No it can not be deducted from the salary of the employee.

It is the amount paid by the employer to the employee if a person has worked in the organisation for continuous period of five years.

The Company may form a Trust or regiatered with LIC for payment of gratuity to its employee. If a company do not form a trust or registered with LIC, the company has to pay from his fund gratuity to its employee at the time of leaving the services provided the employee is eligible to get gratuity under Payment of Gratuiy Act.

There is no need to file any return of the Gratuity by a Trust formed by the Company. Only thing a trust has to do to register itself under Incmome Act and file Balance sheet of the Trust to Income Tax department every year.

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Querist : Anonymous

Querist : Anonymous (Querist)

12 July 2010 Sunil sir....thank you!
have thanked your msg separately.

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Querist : Anonymous

Querist : Anonymous (Querist)

13 July 2010 have seen (during audit) that gratuity is deducted @ 4.81% on basic while paying the employees salary. Is this as per the gratuity act?

Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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26 July 2024 The rate of 4.81% for calculating gratuity payments is not directly specified in the Payment of Gratuity Act, 1972. However, it appears to be a common practice based on actuarial calculations or industry norms.

Here's a detailed explanation:

### **1. **Payment of Gratuity Act, 1972:**

- **Calculation of Gratuity:**
- The Payment of Gratuity Act, 1972 mandates the calculation of gratuity based on the formula:
- **Gratuity = (Last drawn salary × 15/26) × Number of years of service**

- Where:
- **Last drawn salary** includes basic salary plus dearness allowance (if any).
- **15/26** is the formula factor, where 15 days' wages are given for each completed year of service, and the divisor is 26 (number of working days in a month).

### **2. **Rate of 4.81%:**

- **Purpose:**
- The rate of 4.81% might be used by organizations to estimate the annual cost of gratuity liability as a percentage of the basic salary.

- **Calculation Basis:**
- This percentage is typically derived from actuarial valuations. Actuaries assess the company's total gratuity liability and divide it by the total basic salary to estimate an average percentage.

- **Industry Practice:**
- In practice, companies might use this percentage for budgeting or accounting purposes to estimate their annual gratuity liability.

### **3. **Legal Requirement:**

- **Statutory Obligation:**
- The Payment of Gratuity Act does not mandate a specific percentage to be deducted from employees' salaries. Instead, it provides a formula for calculating the gratuity payable upon retirement or resignation.

- **Accounting for Gratuity:**
- Employers are required to account for gratuity as per the provisions of the Act and relevant accounting standards (e.g., AS 15 or Ind AS 19). The contribution to the gratuity fund or provision for gratuity should be based on actuarial valuations rather than a fixed percentage.

### **4. **Best Practices:**

- **Actuarial Valuation:**
- To determine the accurate gratuity liability, organizations should engage with actuaries who will use methods such as the Projected Unit Credit (PUC) method to estimate the liability.

- **Provision for Gratuity:**
- Employers should create a provision for gratuity in their financial statements based on actuarial valuations rather than relying solely on a fixed percentage.

### **5. **Example Calculation:**

Let's break down a hypothetical example:

- **Basic Salary:** ₹30K per month
- **DA (if applicable):** ₹10K per month
- **Total Last Drawn Salary:** ₹40,000

- **Years of Service:** 10 years

- **Gratuity Calculation:**
- **Gratuity = (₹40K × 15/26) × 10**
- **Gratuity = ₹23,077 × 10**
- **Gratuity = ₹2,30,770**

This amount would be payable as gratuity based on the provisions of the Act, regardless of the percentage deducted from the salary during employment.

### **Summary:**

The rate of 4.81% for gratuity deductions is not a statutory requirement but might be used for internal calculations or estimations. The Payment of Gratuity Act specifies how gratuity should be calculated at the time of retirement or resignation but does not prescribe a percentage to be deducted from salaries.

Employers should ensure that gratuity payments are calculated according to the formula provided in the Act and consider engaging actuaries to determine the precise liability.