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Gratuity-Employer Liability-Query - Gratuity Benefit

fikat Started The Discussion:

Hi,

Had a query with regards to gratuity application. We are a organisation of 25 and

has been into existence since 2005. We are taking up gratuity benefit for our
employees and was trying to calculate the % of basic which should be considered
monthly as gratuity.

In the whole process realised that if an employee completes 5 years and has a
yearly increment of min 15-20% on his salary, how is the liability of employer
justified when we consider the 4.81% of gratuity followed by companies generally
and the gratuity payment post 5 years will be based on last drawn basic salary.

Please clarify.

Raj
Posted 20th June 2012 From India, Mumbai

moovendrapandi

Pls click the link and get calculation. (Gratuity Calculator, Gratuity Calculator India,
Online Gratuity Calculator) at http://wealth.moneycontrol.com/jtgratuity.php
Posted 20th June 2012 From India, Pune

fikat

Hi,

Thanks for the same. But my query is not how to conclude on the gratuity figure.
Am quoting an example for your understanding:

Assuming i have an employee with CTC of Rs.10000/- in the year 2008 and an
increment of 5,000 is made to salary every year.

Basic salary is calculated as 40% of CTC

So, employee's salary and Basic salary each year till 2012 is as follows

2008-Rs.10000-Rs.4000
2009-Rs.15000-Rs.6000
2010-Rs.20000-Rs.8000
2011-Rs.25000-Rs.10000
2012-Rs.30000-Rs.12000

Now gratuity would be contributed by company or kept aside on a month on month

basis as per the basic mentioned above each year

But when we end up paying employee at the end of 5 years we take the calculation
as LAST DRAWN MONTHLY BASIC SALARY/26*15 days*5years

considering the 4.8% of basic as the monthly contribution towards gratuity, how is
the co going to compensate on the incremental aspect of the employee gratuity
calculation.

Raj
Posted 21st June 2012 From India, Mumbai

tsivasankaran

There is an accounting procedure for Gratuity provision in the Books of accounts.

If you consult your Finance Head or an Insurance expert, they will explain

Basically following facts are taken into consideration

1. Attrition percentage

2. Percentage increase in salary over years

3. Projected interest

There are a few more figures they take and I am not a finance expert to explain all.
But 4.8 percentage is more than sufficient cover gratuity provision

Assuming that increase is 12% every year, and assume that gratuity provision on
the existing basis every year should fetch 12% interest, then you are very closer to
the grtauity amount on the last drawn basic. There still may be some gap which will
be set off by attrition

T Sivasankaran
Posted 21st June 2012 From India, Chennai

v.harikrishnan

Dear Mr.Raj
The figure of 4.81% is arrived at as follows
Let Rs.100 be the wages of the employee(Basic + DA)
Therefore one day wage is Rs.100/26 = 3.84
Therefore 15 days wages is 3.84 x 15 = 57.69. This is for one year of continuous
service or for 12 months.
Therefore the monthly liability is arrived at by dividing 57.69 by 12 and the answer
is equal to 4.807 or 4.81.
As the gratuity liability per month for a wage of Rs.100 is 4.81. when expressed as
a percentage the liability is stated as 4.81%.
This is a figure for the purpose of accounting and is shown as a monthly liability of
the employer towards gratuity in respect of all the employees and might be kept
aside as "Gratuity Fund" in the books of account or might be kept aside as a
separate fund or might be given to a gratuity trust formed by the employer with the
approval of the Government. If any employee leaves the company before
completing five years of continuous service, then the employer need not pay
gratuity. Such amounts would keep on adding to the "Gratuity Fund". In case of
those who leave the company after five years, the liability of the employer would be
met from the fund. If the funds are not sufficient then the employer has to make
good the difference.m. The 4.81 percent is used more to assess the liability of the
employer under the head "gratuity" than for anything else.
With regards
Posted 21st June 2012 From India, Madras

fikat

Dear Mr.Harikrishnan,

Thanks for your explanation. Its quite a detailed one.

On the same note, just one more query. Assuming that 4.8% of the basic is the
gratuity contribution accounted on a monthly basis, to be more safer can the
employer increase the % to say 5% or more.

Regards

Raj
Posted 22nd June 2012 From India, Mumbai

tsivasankaran

I think it is more a tax related issue. I do not think providing funds more than what is
accepted in accounting norms will be treated as expenses. T Sivasankaran
Posted 22nd June 2012 From India, Chennai

v.harikrishnan

Dear Mr.Raj
Assessing the monthly gratuity liability at 4.81% is for the purpose of providing a
gratuity fund or a reserve for meeting the obligations for the payment of gratuity.
This amount will be shown as having been credited to the gratuity fund of the
company/establishment and in the books of accounts probably would be shown as
"provision for gratuity". This provision for gratuity remains with the company and
this provision when made every month/quarterly/halfyearly/annually does not flow
out of the company's funds. Therefore if you make a provision for gratuity liability at
more than 4.81% there is no legal bar for that action.
On the other hand when the company makes a payment of gratuity to its
employees, there is an out flow of cash and this becomes an expenditure to be
shown in the income-expenditure statement and will be reflected in the profit or loss
made by the company. If the employee is covered by the provisions of the Payment
of Gratuity Act, the maximum amount of gratuity payable is Rupees ten lakhs and
this amount could be claimed by the company as a valid and legal expenditure and
deducted from the income and on this Rupees ten lakhs the company need not pay
tax. On the other hand if the company pays more than Rupees ten lakhs to an
employee covered by the provisions of the Payment of Gratuity Act, then for the
amount paid in excess of Rupees ten lakhs the company may have to pay tax.
There are instances where the companies make payment of gratuity to their
employees covered by the PG Act at a rate higher than that prescribed under the
Payment of Gratuity Act. Also there are other instances of employees who are not
covered by the provisions of the Payment of Gratuity Act being paid gratuity at the
same rates as prescribed under the PG Act or at a higher rate. In such cases what
are the liabilities of the companies under the tax laws, an expert in taxation will be
able to give a correct picture.
Posted 22nd June 2012 From India, Madras

fikat

Thanks for the clarification Mr.Harikrishnan & Mr.Sivasankaran!!!

Is the term "if you make a provision for gratuity liability at more than 4.81% there is
no legal bar for that action" used again with context to the tax benefits or Gratuity
Act. Just trying to understand if it is illegal?
Posted 23rd June 2012 From India, Mumbai

v.harikrishnan

Dear Mr Raj
No law requires an employer to make a provision for gratuity in his
finances/accounts. The only obligation is to pay gratuity at the appropriate time
when the payment falls due. Companies make a provision for gratuity just to have a
reserve fund to meet the contingencies arising when gratuity becomes payable.
Some companies go in for a group gratuity scheme offered by Insurance
Companies. Again there is no law which requires an employee to join a group
gratuity scheme. However in the case of insurance, the situation is different. Please
read section 4A of the Payment of Gratuity Act. This section requires an employer to
take out an insurance, insuring his liability to pay gratuity under the Payment of
Gratuity Act.In other words, the employers liability to pay gratuity is insured by the
Insurance Company. Again please read the opening line of section 4A(1) which reads
as "With effect from such date as may be notified by the appropriate
Government-----etc., This means that section 4A comes into effect only from the
date notified by the Government. As far as my knowledge goes the Central
Government had not made any notification under section 4A. Neither the
Government of Tamilnadu had made any notification under section 4A. I am not
aware of the situation in other States. Therefore in effect section 4A has not come
into operation. Therefore the conclusions are
1.No law prescribes the creation and maintenance of a gratuity fund by the
employer.
2.The provision for gratuity is at the sole discretion of the employer. The rate at
which the provision has to be made is also at the discretion of the employer.
4.Section 4A of the Payment of Gratuity Act which requires an employer to insure
his liability to pay gratuity under the Payment of Gratuity ACt has not yet been
notified and therefore is not in force now, though it forms part of the Payment of
Gratuity Act.
With regards

Posted 23rd June 2012 From India, Madras

dikshajain

a company has no made provision for the payment of Graruity then paymeny of
gratuity is allowed or not. please give relevant case laws (Latest)
Posted 9th February 2015 From India, Udaipur

indrajitmaity

Hi All, I wokred in a company for more than eight years. Am I eligible for gratuity?
Kilndly help .
Posted 30th September 2015 From India, Contai

Write Answer Or Discuss Matter - Keep Your Conduct Professional And Polite.

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