How Do You Calculate Gratuity for Employees Not Covered by the Gratuity Act? Seeking Clarification

I have a doubt for gratuity calculation for employees not covered under the Gratuity Act.

a. Do we have a standard formula for the calculation of gratuity benefit for non-covered employees?

b. The common formula used, in my opinion, is for determining the taxability portion of gratuity received and is mentioned in the IT Act, not in the Gratuity Act. It is 1/2 month's salary for every completed year of service based on the last ten months' average salary.

Seek clarification from readers.

Rajesh Dalmia

Dear Rajesh,

The gratuity calculation is as follows:

(last basic + DA / 26) * 15 * number of years (not less than five)

Dear Jai,

Thank you for your reply. The formula you have mentioned holds true for people covered by the Act. My question is, how to calculate for people not covered under the Act.

Thank you.

Hi Dalmia,

Hope you are doing well. Coming to your query, the staff/employees who are not covered by the Gratuity Act can also receive the gratuity fund, but it depends entirely on the company's capability, turnover, and especially the employer's interest in making the payment of gratuity.

The method of calculating gratuity is different for those who are not covered under the act, and it is as follows:

First, the average salary is calculated: for this, the average of the last 10 months' salary is taken (this will include the basic salary, dearness allowance, and commission as a percentage of turnover achieved by the employee). Divide this average salary by 30 (ignoring fractions). Now, multiply this amount by 15 and then by the number of years of service. Dividing the salary by 30 instead of 26 puts those not covered by the Gratuity Act at a disadvantage.

To illustrate, let's consider an employee whose last 10 months' salary is Rs. 1,50,000/-. Divide this amount by 10 to calculate the average, which results in Rs. 15,000/-. Next, divide Rs. 15,000 by 30 (number of days in a month) to get Rs. 500/- as the daily salary. Multiply this value by 15: 500 * 15 = 7500. Then, multiply 7500 by the number of years of service, let's say 7 years. Therefore, 7500 * 7 = 52,500.

Hence, the gratuity amount for this employee is Rs. 52,500/-.

I hope this explanation clarifies your doubts. Please let me know if you have any further queries.

Dear members, please do not hesitate to inform me if there are any mistakes in my calculations. I hope everything is accurate.

Best regards.

Hi Padma,

Thank you for your detailed response. The calculation mentioned by you is one of the options as per IT provisions to arrive at the taxable and non-taxable parts of gratuity paid to an employee who is not covered by the Act. I have also tried to search a lot on this matter, but it seems that this is the most acceptable norm to calculate gratuity for employees not covered by the Act.

Thanks once again for your response.

Rajesh

I would like to know, does a company have to get registered under the Gratuity Act to become liable to pay the gratuity amount?

Eligibility for Gratuity with Rejoining

Secondly, if an employee has completed 3.5 years of service with the organization and leaves the organization, then rejoins it again, does he become eligible for gratuity, or do his terms of service start again as fresh?

Regards,
Deepti