Gratuity Confusion: Why Did LIC Calculate Based on Gross Salary Instead of Basic?

Hi,

I am working as an HR executive. One of my employees resigned, and we have a group gratuity. I submitted all the information regarding him to LIC Office. They sent a DD for some amount, which is calculated based on the total gross salary, not the basic salary. Please help me.

Thanks & Regards,
Ravikumar

Hi,

Please check the definition of 'wages' in the Payment of Gratuity Act. Gratuity is payable on Basic and also Dearness Allowance.

Cyril

Hi,

Gratuity, as per the provisions of the Payment of Gratuity Act and rules made thereunder, is calculated on basic wages and DA, and not on gross wages. As per section 2(s) of the Act, "wages" means all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of employment, and which are paid or payable to him in cash, and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages, and any other allowance. No upper limit to salary has been prescribed in the Act.

Regarding income tax on gratuity payments made to employees, any payment exceeding Rs. 3,50,000 would attract tax at the source at applicable rates.

Regards,
K.S. Venkatachalam

Mr. Venkat,

Did you understand my question? I know gratuity is calculated on basic + DA, but here the DD that I received from LIC Office is calculated on Gross Salary. So what should I do now? Can I send back the DD to LIC Office for correction? Please tell me.

Dear Ravi,

Please check the Gratuity policy that you have taken with LIC for the number of days considered in the calculation. Also, verify the data that you have submitted to LIC. After that, kindly contact the relevant LIC office to confirm the amount with them. If there is any error on their part, they will certainly retrieve the check and issue a new one. The only downside is that LIC usually takes a bit longer to reissue the check.

In view of the provisions of the Payment of Gratuity Act, you may have to return the cheque to LIC and ask them to recalculate the gratuity. However, before doing that, I suggest you go through the LIC's master policy, a copy would have been handed over to you at the time of formation of the trust, whether your company had agreed to pay gratuity on CTC. I have seen few policies where companies have gone beyond what is prescribed in the Act. For example, few companies have agreed to pay gratuity at 30 days for every completed year of service, instead of 15 days, to employees who have rendered 10 or more years of service with the organization. In such cases, Income tax will be calculated as per the provisions of the Gratuity Act, and the balance amount would attract tax as per applicable rates.

If you still need clarification, you may send an email to vepaje@yahoo.com.

Regards,
K.S.Venkatachalam

Gratuity is payable on basic only, but in certain organizations, they give the benefit to employees where the amount is calculated on the gross salary. Though, as per rules, the maximum amount of Non-Taxable Gratuity is Rs. 3.5 Lacs, certain organizations pay more which attracts tax. Please check the policy and speak to LIC about the basis of working, and take feedback from them. Have a meeting with them to discuss things in detail.

The definition of wages, as we know, varies from statute to statute. Wages have been defined in the Payment of Gratuity Act, 1972 under section 2(s), stating in crystal clear terms that it includes dearness allowance. Our friends Venkat and Cyrill have already mentioned the same earlier. Therefore, it can no longer be a matter of opinion whether it comprises only basic pay or includes D.A. I think the section is quite self-explanatory on this aspect.

Ashok