Gratuity Calculation Confusion: How Do Working Days Affect Eligibility and Amount?

Hi,

Please inform me regarding the procedure of Gratuity calculation. How will you calculate gratuity based on working days? What is the minimum eligibility for an employee's working days in a year? Please help us in this regard as soon as possible.

Formula for Calculating Gratuity:
Gratuity is payable at 15 days' wages for every completed year. If, in the last year, the service is more than 6 months, it will be counted as a full year for the purpose of gratuity. It is applicable only after the 5th year onward. The general formula is: (15/26) * Number of service years * Last wages drawn. In the case of a seasonal establishment, gratuity is payable at 7 days' wages for each season.

Maximum Gratuity Ceiling:
The maximum limit was raised (effective from 24th May 2010) from ₹3.5 lakhs to ₹10 lakhs.

Compulsory Insurance for Gratuity Liability:
Every employer has to obtain insurance in the manner prescribed for their liability for payment towards gratuity under this act, from the Life Insurance Corporation of India established under the LIC of India Act or any other prescribed insurer.

Nomination under the Act:
Each employee who has completed one year of service is required to make a nomination for the purposes of gratuity in case of their death. There can be more than one nominee in "Form F." Nominees may be changed at any time by the employee by giving written notice to the employer.

Forfeiture of Gratuity:
Gratuity can be forfeited where an employee has been terminated:
(a) for any act, willful omission, or negligence causing any damage or loss to or destruction of any property belonging to the employer,
(b) for riotous or disorderly conduct or any act of violence on their part,
(c) for any act which constitutes an offense involving moral turpitude, provided the offense has been committed by them in the course of their employment. However, the employer must terminate the services of the employee because of this damage.

The forfeiture can be done in three categories of misconduct: (i) NIL, (ii) to the extent of loss or damage, and (iii) the whole amount of gratuity.

The Period of Service for Gratuity Payment

Your gratuity increases with the length of your service period. To be eligible for gratuity, you must complete more than 4 years and 6 months in service, effectively 5 years.

For gratuity calculation, the years of service are rounded off to the nearest integer. For instance, if you have completed 7 years and 7 months, the length of service for gratuity calculation would be considered as 8 years. Similarly, if you have completed 9 years and 5 months, the period for gratuity calculation would be 9 years.

According to the law for gratuity calculation, your salary will include only the following components:

Basic Salary

Dearness Allowance (if any)

This means that HRA, bonus, special allowance, and reimbursements are not considered for gratuity calculation. This is why private sector employers often try to keep the basic salary low.

Formula for Gratuity Calculation

According to gratuity rules, you must receive the salary of 15 days for every completed year as gratuity. For example, if you have completed 5 years in service, you should receive gratuity equivalent to one day's salary multiplied by 15 and then by 5. It seems straightforward.

But what constitutes a day's salary? Is it a monthly salary divided by 31 or by 30? No, it is a monthly salary divided by 26. This is because, according to labor law, every employee is entitled to weekly offs, making the average working days in a month not more than 26. Therefore, your one day's salary would be a monthly salary divided by 26.

Gratuity = Number of years * Last drawn salary of 15 days

= Number of years * 15/26 * monthly salary

Example of Gratuity Calculation

A person works in a food processing company as a marketing manager. He receives a basic salary of Rs 26,000, a dearness allowance of Rs 8,000, a special allowance of Rs 21,000, and reimbursements of Rs 45,000. After 6 years and 8 months of service, he resigns from the job. What would be his gratuity?

The last drawn salary of the person:

= Basic salary + DA

= Rs 26,000 + Rs 8,000

= Rs 34,000

Years of Service:

= 6 years and 8 months

= 7 years

Gratuity:

= Salary * years * 15/26

= Rs 34,000 * 7 * 15/26

= Rs 1,37,308

This should provide sufficient understanding about gratuity.

Your query is without the required details. Please do not pose hypothetical questions. Do you work 5 days a week or 6 days a week? In the case of the former, you are required to work for 190 days in a year, and in the case of the latter, for 240 days. Based on the above calculation, you should have worked for 5 years to be eligible to receive gratuity.