Why Are Leave Encashment and Bonuses Calculated Only on Basic Salary? Let's Discuss!

Hi All,

During an interview, I was asked a question which is still unanswered. Why is leave encashment, PF deductions, and bonus calculations done only on the basic salary?

Thanks,
Vidya Pai

Hi Vidya,

In the Factory Act of 1948, it is clearly defined that the calculation of leave, bonus, and PF will be based on the salary. Not only the Factory Act, but you may also refer to the PF and Bonus Acts for the same. Basic salary is equal to wages, which is reflected in every act.

Regards,
chamscld@gmail.com

Dear Vidya,

Your question is why leave encashment, PF deductions, and bonus calculation are done on basic.

Let me clarify that it is not mandatory to calculate leave encashment on basic; it can also be done on gross. This calculation varies from company to company because the law is silent on this.

PF deductions and bonus are calculated on basic because it is specified in the act. We are following the law of the land in this regard.

Thank you.
J.S. Malik

Dear Vidhya,

Leave encashment varies from company to company and from policy to policy. For instance, the "head of the organisation" may mention in a meeting that if certain targets or goals are met, the company will provide a gross amount (possibly double the daily rate) for leave encashment in order to discourage excessive leave-taking tendencies. Similarly, the opposite may occur during times of recession.

The typical calculation is as follows: if an individual has 10 days of leave encashment and is entitled to Rs. 10,000 per month, the calculation would be Rs. 10,000 / 30 = Rs. 333.33 X 10 days X 2 = Rs. 6,666.60. I hope this information is helpful to you.

Dear Vidya,

It is correct that there is no provision in any of the labor laws which entitles any employee/worker to encash his/her leaves in between the period of employment. While making full and final payment, the earned leave encashment is made according to the Factories Act or State Shop Act, whichever is applicable, up to the maximum limit under these Acts. It is calculated at the rate of the last drawn salary/wages. According to the definition as laid down under section 2(21) of the Payment of Bonus Act, 1965, the bonus is to be paid on the basic wage plus dearness allowance. Free food allowance/food is also considered if provided as part of wages to the employee. We have to go through the definition of wages in cases where there is a bifurcation in salary components only. Otherwise, where there is daily or consolidated monthly wage determination, there is no dispute regarding the calculation of benefits for the employees.

Opinion submitted as per your request.

Regards,

R.N. Khola
Sr. Associate

Regards

Dear Vidya,

In my opinion, the gross package or CTC varies from company to company. Different organizations adopt different salary structures. This may be the reason for a unified settlement to avoid any kind of bias among employees at the same level. The base salary would vary based on levels, but calculating encashment and other statutory benefits on the base salary would help in avoiding considering other perks or performance-based incentives. This approach would make the policy uniform for all.

Regards,
Suman

Hi Vidya,

Leave encashment is calculated based on the basic salary, so it obviously varies for each individual employee's remaining earned leave days divided by the total days in the month. This formula is used to calculate the amount for leave encashment.

Thank you.