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: Gratuity years mean the number of years of service done by the employee in the company. For example, Mr. A joined the company on 1.12.2000 and left the services 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 as the month is over and above 6; it should be counted as one year - this is called 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: 26,000 x 15 x 10 divided by 26. Then the amount of gratuity will be Rs. 150,000.

Clarification 3: Since continuous service is emphasized in the Gratuity Act, it is applicable only for regular employees. As you mentioned, employees paid weekly wages, their salary for Sunday is not calculated, and they are treated as casual employees; for those, gratuity is not applicable. But if they are treated as permanent employees on your rolls by considering the continuous service, they are also eligible for gratuity.

Clarification 4: Yearly 15 days mean that 15 days' salary for a year of service is paid as gratuity. I hope this clarifies it for you.

P. Ramachandran

Dear Piyali,

Please see the attachment which is useful to you.

Thanks,
P. Ramachandran

PF Computation

Employees Contribution = 12 % of Salary Earned
Employer's Contribution = 8.33 % of Salary Paid
__________________________________________________ ____
Total = 20.33 % A/c. No. 1

Employer's Share - Pension Fund : 3.67 % A/c. No. 10
Administration Charges : 1.1 % A/c. No. 2 D.L.I. : 0.5 % A/c. No. 21
Adm. Charges of D.L.I. : 00.1 % A/c. No. 2 (Min. Rs. 2/-)
NB: In above contribution only 12 % for PF is to be deducted from the salary earned by each of the the Employees and rest all is to be deposited by the Employer.