Gratuity Calculation Scenarios and Payment of Gratuity Act Analysis

Hi all,

I need a clarification for gratuity computation. The scenario is as follows: An employee joined on 10th January 2005 and he met with an accident on 30th April 2012. He resigned on 15th July 2012. So when computing his gratuity, there is a split - salary up to 30th April 2012 (Rs. 15,000) and up to 15th July (Rs. 9,500). How should his gratuity be calculated? Is there a need to calculate the last 3 months' gratuity? Since when rounding it, it maps to 0.

Regards,
Sivajith S.

The Payment of Gratuity Act 1972 states that gratuity shall be payable to an employee upon the termination of his employment after he has rendered continuous service for not less than five years. It is provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.

For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned.

In this case, you are required to calculate the gratuity based on the last drawn wages. The employee resigned on 15.07.2012, and gratuity has to be calculated based on this date. I would like to know how his salary decreased from Rs. 15,000/- to Rs. 9,000/- and what will be his basic and DA (if applicable).

Hi,

The condition is when he joined, his designation was 'A', and after that, he couldn't do the same work due to any reason, and the company changed his designation to 'B'. Now you may be clear.

Regards,
Sivajith S.

In this case, you may calculate his Gratuity based on his last drawn basic+DA.

As per DOJ & DOL, he worked for 7 years, 6 months, and 5 days, which rounds up to 8 years. If we consider his last drawn basic+DA as Rs. 9,000/-, the calculated amount will be Rs. 9000/26*15*8 = Rs. 41,538/-.

Hope this helps you.

Dear,

I came to understand by Sivajith's query is that, after meeting with an accident, due to temporary disablement, his salary might be reduced to 60% of his wages. That is the reason his salary is $9000 instead of $15000 at the time of resignation, if I am not mistaken.

So please provide clarity based on the above point. If an employee's actual salary is $15000 and let's say his service is 5 years, and immediately after 3 months, he met with an accident, resulting in his salary becoming 60% of his current salary, which equals $9000, and he resigned after 5 years and 3 months.

Now the question is, is the Gratuity calculation either $9000/26*15*5 years? or $15000/26*15*5 years?

Whatever the case may be, as per the Payment of Gratuity Act, the gratuity amount will be calculated based on the last drawn basic + DA, irrespective of the changes in salary.

Thank you.

Formula for gratuity calculation as per the Gratuity Act of 1972 is as follows: Basic (last drawn) + DA (if any) * 15 * completed service years / 26 = gratuity amount.

Pawan Thakur

Hi Dear Sivajith,

You should calculate gratuity on 9000/-. not on 15000/-. Last drawn salary (Basic + DA)

Biju

Respected Sirs,

If an employee has worked for 5 years, 7 months, and 3 days, how should we calculate gratuity? Do we consider the service in a round figure or based on actual service?

(Basic + DA) / 26 x 15 days x 5 years, 7 months, and 3 days

Please assist with the calculation.

Regards,
Rahul

15 days' salary for every completed year of service component for gratuity calculation is basic + DA = VDA.

Madhavan
HR
Rane EVL

Hi Sivajith,

The condition is when he joined, his designation is 'A', and after that, he can't do the same work due to any reason, and the company changed his designation to 'B'. Now you may be clear...

Regards,
Sivajith S.

You can't reduce the BASIC & DA at any point of employment once it's given and after processing the first-month salary. It's against the law. Anyhow, it's an issue of the calculation of Gratuity. Take the last drawn Salary (Salary = BASIC + DA) and (last drawn salary = Actual salary not earned salary). You will be on the safe side unless the employee objects or challenges the reduction of Basic & DA.

It is unfortunate that he would be a loser for no fault of his, but law is law. And it clearly states that the last drawn salary is to be taken into consideration. However, if his new salary of ₹9000 is a result of his fresh appointment on a lower scale of pay, then ignoring this period of service, you may pay gratuity for the period he was drawing ₹15000 if otherwise eligible.

Mr. Sivajith,

Please read Section 4(4) of the Payment of Gratuity Act. You have to calculate gratuity on ₹15,000 for his service up to the date of disablement and on ₹9,000 for the services after the disablement if you have reduced his wages.

Varghese Mathew
09961266966

Hi,

Thanks Varghese Mathew. One more doubt - if the employee worked for a salary of 15000 for 4 years and 7 months and for 9000 for 3 months, how do we calculate his gratuity? Is there any rounding off involved?

Regards,
Sivajith S.

In the cited case, pay him 5 years of gratuity on Rs. 15,000/- if the service is uninterrupted.

Varghese Mathew

Hi Varghese Mathew,

So, rounded 4 years 7 months to 5 years and 3 months to 0 years...right?

Regards,
Sivajith S.

Dear All,

If you go through the Gratuity Act, you can find the below point:

For the purpose of computing the gratuity payable to an employee who is employed after his disablement on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period. His wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.