Why Is "Basic" Salary Tied to Notice Pay and Leave Encashment? Let's Discuss!

Dear Friends,

Could you please let me know why "basic" is considered to be a variable linked to notice pay and the leave encashment?

Regards

It varies from org to org. There is no fixed guideline to consider only basics for notice pay and leave encashment.

Regards,
R. Ponraj

Hi, most companies consider basic pay for the notice period and leave encashment. The reason for this is that other allowances, such as conveyance, attendance, washing, or any other allowance, are paid only when the employee actually comes to work. If the employee is not coming to the company, there is no need to pay conveyance, attendance allowance, and other such allowances. This could be one of the logical reasons that I feel.

Thank you.

Thank you for the response, friends. However, I'd like to request some notes or further clarification on the same. I would be grateful if anyone could provide me with more insight.
Regards

You will need to define these. In the case of notice pay in-lieu, you have the option to decide if you want to consider basic or all allowances. Similarly, in the case of leave encashment, you can decide if you want to consider only basic or include all allowances.

The reason why you would want to look at notice pay recovery/leave encashment the same is that many times, the notice period gets adjusted with the accumulated leave balance and also for your P&L closure. All that you need to keep in mind is the cash outflow—the accumulation of leaves and hence the cash outflow; notice period shortfalls, the money that is due from the employee to the organization.

At the time of termination of employment, the employer has to give a notice in writing to a monthly-rated workman (of one month or wages in lieu thereof) or a daily-rated workman (of 14 days or wages for 13 days in lieu thereof).

Refer to the definition of 'wages' under the Payment of Wages Act, 1936. It doesn't merely include the basic salary alone. Also, refer to provisions of the Industrial Employment (Standing Orders) Act, 1946.

Don't assume things, and don't get misled by general comments.

I am surprised at this query. The very word "basic" in Basic Pay explains this. There are several statutory compliances and provisions which are based on "Basic Pay" because of its 'basic' nature - it is the "base" or 'basis' for all other calculations. One can add on any number of allowances as a percentage or proportion of basic pay; e.g., House Rent Allowance, Medical Allowance, Leave Travel Allowance, etc., to make the Gross Pay. Hope the above clarifies the issue for you.

Warm regards.

Hi, how is it clarified Raj, sir?

I want to ask: does the notice period include only the basic salary, or can we also include guaranteed cash in it legally?

Please clarify once again in simple words.

My response was for the question asked by hrhaigreeva: "Why is basic considered to be a variable linked to notice pay and leave encashment?"

I think the question you are asking now is slightly different. You are not asking "WHY basic pay is considered" but "whether ONLY basic pay should be included or one can include 'guaranteed cash' in the Notice Period."

Hope I have understood your question correctly. If not, you may kindly clarify before I suggest anything. In your case, I do not wish to hazard an answer unless I know what EXACTLY you are looking for.

Warm regards.

Yeah, Sir, you have rightly taken my question. "Whether ONLY basic pay should be included or one can include 'guaranteed cash' in the Notice Period. [LEGAL WAY] Plz Suggest...................

Understanding Basic Pay and Allowances

The pay, for all practical purposes, is Basic Pay. All other allowances (e.g., DA, HRA, CCA, Conveyance allowance, LTA, Medical allowance, etc.) are in the nature of compensatory allowances for meeting expenses due to the increase in the cost of living (DA) or are of a reimbursement nature (e.g., House rent, Conveyance, medical, cost of travel on leave travel, etc.). Moreover, for statutory requirements such as PF, etc., the pay is considered Basic Pay only. As such, for notice pay, only Basic Pay is considered and not other allowances of a compensatory/reimbursement nature.

Regards,
TR Chhabria

As far as encashment is concerned, like leave, gratuity, bonus, and EPF, the component of basic + DA is to be considered rather than gross pay. However, for notice pay, only gross pay is considered.

Sumit Kumar Saxena
+91-9899669071, 0120-4131277

Your query has been answered correctly by T R Chhabria. I would like to add that generally, DA is also included. No other allowances are included unless the terms of appointment specify otherwise. However, adding all other salary components while calculating the deduction of Notice Pay from an employee would not be considered a good and fair HR policy.

Warm regards.