Nagarkar Vinayak L
Private Consultant On Labour Laws
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Dear Friends
Please help me with the answer of the query mentioned below.
My erstwhile organization is a Delhi based one. We did not have any 'Dearness Allowance' (DA) component in our salary sheet. Instead of it we do have a 'Variable Allowance' along with the Basic pay. My question is, whether this variable allowance can be regarded as DA during calculation of gratuity or the gratuity will be calculated only on the Basic portion? If the first one is right, then please mention the rules under Gratuity Act which we can submit to the Company Management.
Awaiting for your early reply.
Rumki Ghosh
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Dear Rumki Ghosh,
Section 2(s) of Payment of Gratuity Act defines "wages" means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and include dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.
I am of the opinion that if the variable allowance, paid to you, is linked with the cost of living index and varies from time to time, then it can be construed as Dearness allowance otherwise the calculation of gratuity shall based on the Basic only.
BS Kalsi,
Member since August, 2011
Hi, The calculation of gratuity shall based on last drawn Basic only. As per Gratuity act.
Dear Rumkiji,

##Firstly, you have to decide is it variable allowance or variable dearness allowance (VDA) because both are different meaning.

$$$ If it is variable allowance is also known as variable pay or performance pay used to recognize and reward employee contribution above and beyond their normal job requirements. It is based on two main factor one is your performance and second is your company performance. Practically,at junior level it ranges 10-15% of fixed pay,at middle level it ranges from 15-30% and at senior level it ranges from 30-50%.

It is not guaranteed payable to employees also may be bind with company policy (like performance bonus payable for each complete service year etc.means if you leave company before completing one year your performance bonus would be zero). Variable pay may vary from 0-100%.

Variable pay is the part of salary package.we will get fixed pay at the end of every month but variable pay once in a quarterly, half yearly or yearly basis.At the end of every quarter,half year or year company announces some percentage which would be given as part of variable pay.

In salary structure there are two types of package i.e. fixed pay and variable pay.

Let assumes that total salary package is Rs.5000 per month.Out of which Rs.3500 as fixed pay and Rs.1500 as variable pay. So Rs.3500 will get at the end of every month. Now Company announce the variable pay be 80% so we get 80% of Variable pay (of Rs.1500) is Rs.1200,so at the end of quarter we will get Rs.1200*3= 3600.

Variable pay programs includes annual incentives,individual incentives, lump-sum payments,cash profit -sharing plans etc.

We knows that Incentives is also known as Commission and The payments of Gratuity Act defines that "Commission" does not included at the time of Gratuity calculation.

$$$ If it is Variable Dearness Allowances is a part of Dearness allowances. Dearness allowance is generally divided into FDA (fixed dearness allowance) and VDA (variable dearness allowance) and ratio is 70:30.

FDA may vary from one organisation to another but VDA calculated at a rate arrived/agreed. VDA revised twice in a year on 1st April and 1st October. VDA is related to Consumer Price Index (CPI).

We knows that VDA is a part of DA and The payments of Gratuity Act defines that Salary will Included "Basic Salary and Dearness Allowance". Hence Gratuity will be calculated include Basic Salary and VDA.

I hope it will be helpful for you.


If variable component ls linked to performance then will not be considered for gratuity but linked to cost of living index then it is DA and has to be taken into account while computing gratuity.
Difference betn Variable allowance and VDA. I think the TS is talking about Variable allowance linked to performance. In this case, it is not considered. Pon
If there is no DA calculation of gratutity on basic only. If Some industries has VDA, in this case we have to consider Basic+ VDA for calculation
As per definition of wage under Gratuity Act, basic and DA (VDA also) included. Regards
I pay both DA and VDA to my employee now do i have to consider both DA and VDA in gratuity or only basic + DA or basic+DA+VDA..
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