Gratuity Calculation Confusion: Is It an Expense or Part of Production Costs?

Sir, can anybody clarify whether there is a particular format or register to calculate gratuity? Is this considered an "expenditure" for the paying company or firm? If it's a manufacturing unit, should the gratuity amount be added to the cost of production or considered as an expense?

Thank you.

Calculation of Gratuity:

(BASIC SALARY * NO. OF YEARS SERVICE * 15 DAYS) DIVIDED BY 26

Here, the number of years is to be considered a full year if the employee crosses more than 6 months into the next year. For example, an employee with 7 years and 7 months of service should have the number of years considered as 8 years, while an employee with 7 years and 5 months of service should be considered as 7 years only.

Eligibility for Gratuity: An employee must complete 5 years (not 4 years and 6 months, etc.) to be eligible for gratuity.

There is no prescribed format for the Gratuity register under the act. Instead, you may have a register containing the following columns:

- Sl. No.
- Employee number
- Name of the employee
- Father's/husband's name
- Date of Birth
- Nominee to the Gratuity
- Date of Joining
- Date of Leaving
- No. of years service
- Gratuity years
- Salary at the time of leaving
- Amount of gratuity
- Date of payment
- Mode of payment
- Signature of the employee

Question 2:

It is an expense to the firm and allowable under the IT Act, etc., but it is not to be considered a direct cost when preparing a cost sheet. It will be included as part of administrative overhead.

Dear Bikash,

Clarification for 1: Understanding Gratuity Years

Gratuity years refer to the number of years an employee has served in the company. For example, if Mr. A joined the company on 1.12.2000 and left on 17/08/2010, his total service years are 9 years and 9 months. This is called the number of years of service for the employee. It is rounded to 10 years because the months exceed 6; thus, it is counted as one year. This is known as gratuity years. His last drawn salary or the salary at the time of resignation is Rs. 26,000 per month.

Clarification 2: Calculation of Gratuity

To calculate gratuity: 26,000 x 15 x 10 divided by 26. The gratuity amount will be Rs. 150,000.

Clarification 3: Applicability of Gratuity for Different Employees

Since continuous service is emphasized in the Gratuity Act, it is applicable only for regular employees. As you mentioned, employees paid weekly wages do not have their salary for Sunday calculated and are treated as casual employees; for them, gratuity is not applicable. However, if they are treated as permanent employees on your rolls by considering continuous service, they are also eligible for gratuity.

Clarification 4: Yearly 15 Days Calculation

Yearly 15 days mean that 15 days' salary for a year of service is paid as gratuity. I hope this clarifies it for you.

Regards,
P. Ramachandran

Dear Piyali,

Please see the attachment which is useful to you.

Thanks,
P. Ramachandran