Unpaid Gratuity: Untapped Goldmine for Government & Private Sector Employees

Rakesh has 20 years of experience in 5 different Private companies, and he has worked for about 3 to a little less than five years in each company. Based on his last drawn salary, he has lost almost 1 Lac per year, even though it was part of his Pay Package / CTC.

The money Ramesh has lost is in Gratuity,

Gratuity is a lump sum amount that employers pay their employees as a sign of gratitude for their services, rendered by them during the period of employment, under The Payment of Gratuity Act, 1972.

Currently, every private company includes approximately 5% of basic pay as gratuity in an employee's salary structure and keeps it part of the employee CTC. However, an employee is eligible to receive gratuity only if he/she has completed a minimum of five years of service with that organisation.

Market research data says that more than 50% of private-sector employees change their job in less than five years. So this gratuity money that is being unpaid can be accounted for as corporate profit.

Currently, there are approximately 4.5 Cr registered active EPFO members (ET News dated Nov 25, 2019), assuming 50% of them are in non-government jobs. Hence, we can say that about 2.25 Cr people are private-sector employees, out of which 50% change their positions in less than five years, which means that approximately 1.125Cr persons lose their gratuity amount, which is the part of their pay package.

Now, assume a lower figure. Let's say that approximately INR 10,000 average gratuity per year per employee is being saved on every such employee who leaves before the completion of the five years. So about INR 11,250 Cr total Gratuity/year is staying back with the Corporate. This money is just adding to the corporate profit.

This 1972 rule should be relooked and relaxed so that private employees can get their lost gratuity, and the Government will get the taxes on their rightful pay. Hence, it will be beneficial for both parties and at least some tangible money in hand of working citizen during this Pandemic.

Proposed solution: The Government should make companies give back the gratuity specified in the salary structure to employees as regular salary with TDS. This will allow both the employees and the Government to access the considerable sum of money. At present, most private-sector employees are struggling on this front. It will be a good option worth considering for the Government to give huge relief to them, without spending any money from their pocket, but earn significant tax income in return. They can, however, consider a minimum tenure of 1 year lock-in period. Post that, they can continue the five years existing rule.