Employees will receive higher gratuity once the Code on Social Security is implemented but at the cost of lower take-home pay.
Gratuity for both fixed-term and regular employees will be calculated on wages which will be 50% of the total remuneration. Wages will include basic pay, dearness allowances and retaining allowances.
If other payouts such as bonus, house rent allowances, conveyance allowance, etc exceed 50% of the total remuneration, the excess amount will be added back to wages.
For gratuity, employers deduct 4.83% of the employees’ wages every month. “With the change in the definition of wages, this amount will go up reducing the take home salary for employees,” says Vinay Joy, partner, Khaitan & Company.
Till now, gratuity is calculated only on basic salary and dearness allowance. Employers will have to restructure the salary structure to comply with the new labour code. So, as per this broader definition of wages, the amount of gratuity payable to the employees is likely to increase in most cases.
Akhil Chandna, partner, Global People Solutions Leader, Grant Thornton Bharat, says as an industry practice, many employers include gratuity benefits as part of the agreed gross remuneration or the cost-to-company (CTC). “As a result, while gratuity benefits may increase, employees could see a reduction in their monthly take-home salary.”
In cases wherein gratuity is paid to employees over and above agreed remuneration or CTC, the higher gratuity will not have impact on net take home pay of employees. “However, this will increase the overall cost for the employer,” says Chandna.
Time period for gratuity
The government has reduced the eligibility requirement for gratuity for fixed term employees from five years to one year. A fixed-term employee is engaged under a written contract that specifies a definite period of employment. However, for regular employees engaged on an indefinite basis, gratuity continues to be payable only upon completion of five years of continuous service.
For employees whose fixed-term contracts are renewed automatically, they will be seen as uninterrupted service and each renewed term will be treated as part of the same continuous service and gratuity will be paid for the entire tenure upon cessation of the contract.
“When a fixed-term contract is extended or renewed, the gratuity entitlement will continue to apply for the entire duration of continuous service completed by the employee with the employer,” says Munab Ali Beik, head, Compliance Advisory, Core Integra.
Salary restructure
“Most organisations typically limit basic and dearness allowance components to only 30–40% of an employee’s total compensation, with other allowances constituting the balance,” says Joy. To comply with the 50% rule now, a portion of these allowances (that are in excess of 50% of total remuneration) will have to be considered as wages.
Once salaries are restructured to comply with the wage limit, employees may have lower tax-exempt components and higher taxable income. This results in higher income tax liability, which will further impact the net take-home salary.
The gratuity amount is calculated as 15 days’ wages at the time of payout to the employee for every completed year of service.
Gratuity amount of up to Rs 20 lakh is exempt from tax. The amount must be reported in the income tax returns under the exempt in Schedule EI.