Gratuity Calculation Confusion: How Do Partial Years Affect Your Payout?

Gratuity Calculation Query

Can anyone give me suggestions on my doubt regarding gratuity?

Gratuity is applicable if an employee completes 5 years of continuous job service. In what situations should the total number of years be calculated:

1. If an employee completes 5 years and 4 months and wants to resign.
2. If an employee completes 5 years and 6 months and wants to resign.
3. If an employee completes 5 years and 7 months and wants to resign.

How many years are taken into consideration in the calculation of gratuity?

After five years, if workers work more than 6 months but less than a year, then it is calculated as another one year. But if they work less than 6 months after five years, then it will not be considered as another year. So the gratuity will be calculated as below for your queries.

1. If 5 years and 4 months = 5 years only.
2. If 5 years and 6 months (180 days) = 5 years only. (If it is 181 days, then you can calculate for 6 years).
3. If 5 years and 7 months = 6 years.

Regards.

Dear Shenbagaraja, Thank you for the advice. I would like to know the criteria of 180/181 days. There is no mention of the specific number of days in the Act. It would be considered in excess of six months, so please clarify.

Regards,
pkjain

I don't agree with you here. The provisions of Sec. 4(2) are very clear on the issue.

Gratuity Calculation Based on Service Period

The section states, “For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee…” As such, an employee who has a service period of 5 years and 6 months would be entitled to gratuity for 5 years only. Of course, if he/she has 6 months + 1 day or more, then it would be 6 years.

Please don't mix the 26 days/30 days presumption criteria for the calculation of the length of service. Presumption criteria will not be acceptable while there is a clear-cut provision in the Act itself.

Thanks

Pkjain

Dear PK Jain, Revisit my answer to Bhavya and reply whether you agree or not. I had clearly mentioned that for 6 months and 1 day, it will be calculated for the whole year. (Normally we will go by 180 days for 6 months). If you don't agree, can you explain what 6 months in days is in gratuity?

Dear Shenbagaranjan K, I would like to explain by giving an example.

Suppose Mr. X joined a company, and his date of joining is 1.10.2006. He resigned and was relieved effective from 1.4.2012 (after working hours on 31.3.2012).

Length of Service and Eligibility for Gratuity

Length of service:
2012-4-1
2006-10-1
5 years, 6 months, 0 days

Five years of service were completed on 30.9.2011.

Number of Working Days in the Last 6 Months (from 1.10.2011 to 31.3.2012)

- Oct'11: 30 days
- Nov'11: 30 days
- Dec'11: 31 days
- Jan'12: 31 days
- Feb'12: 29 days
- March'12: 31 days

Total days worked in the last six months: 182 days

As per your views expressed, "if years and 6 months (180 days) = 5 years only (if it is 181 days, then you can calculate 6 years)."

In the present example, though Mr. X worked 182 days in the last six months, he would not be entitled to gratuity. However, as per your version, he would be entitled as he worked more than 180 days.

I hope now I have been able to explain my point of view. This is the legal position upheld in one of my company's cases by the court. Due to professional ethics, since it is not a reported case, I would not be able to share it; otherwise, I would like to share it on CiteHR.

Now it is up to you to accept/appreciate it or not. But certainly, the feeling of your comment and Bhavya's comment does not give a good test. I am putting it for the benefit of the other readers of this site.

Regards,
pkjain

Normally, 180 days are calculated for 6 months, which every company uses to calculate the probation period for employees. If you are specific about the exact number of days, I agree with you. However, in your example, the employee X is entitled to gratuity for 6 years because 1-Apr-2012 fell on a Sunday. Even though the employee was relieved from services on 31-03-2012, he is entitled to leave for working 6 days a week. Therefore, on the 1st, he is still considered an employee of the organization. Hence, you have to count 183 days, which is equivalent to 5 years, 6 months, and 1 day. He cannot be denied gratuity for the entire year.

Thank you.

Gratuity Calculation and Eligibility

Gratuity is calculated after the completion of 5 years of service. As rightly said, if an employee has completed 240 days in the last year, then he is entitled to gratuity. If he has not, then he is not entitled to gratuity. Recently, the High Court has ruled that if an employee has completed 4 years and 8 months, then he is entitled to gratuity.

Gratuity is calculated as follows: Basic + DA / 26 x 15 x Number of years of service.

Regards,
Jay Kumtekar

Jain ji, it's a nice example you quoted. Yes, I agree with you. More than six months only count as 1 year. I have one doubt: if he rendered his services for 4 years 11 months 29 days, does he get eligibility for gratuity?

As per Section 4(1) of the Payment of Gratuity Act, which is reproduced as follows:

“Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:

- On his superannuation, or
- On his retirement or resignation
- On his death or disablement due to accident or disease…”

From the above provisions of the Act, an employee who has worked less than 5 years is not entitled to gratuity.

However, there is a decision of the Madras High Court in the case of Mettur Beardsell Ltd., Madras v/s Regional Labour Commissioner (Central), Madras, reported in 1998 III LLN 414, where the concerned employee had put in 4 years, 10 months, and 18 days of service and was held to be entitled to gratuity.

In another case, the Hon'ble Supreme Court in the matter of Grand Kakatiya Sheraton Hotel and Towers Employees and Workers Union v/s Srinivasa Resorts Ltd., reported in 2009 5 SCC 342, upheld the judgment of the Andhra Pradesh High Court, which struck down as unconstitutional the provisions of the Andhra Pradesh Shops and Establishments Act by which gratuity was made payable even to employees who had not completed 5 years of service as per the Payment of Gratuity Act, 1972.

In view of the judgment of the Apex Court, which has become the law of the land, it can be said that an employee who has not completed the eligible period of 5 years is not entitled to gratuity.

Regards,
Pkjain