Understanding Gratuity and Dearness Allowance: How Do You Calculate Them?

hi dear all,
this is jyoti here and have just completed my h.r degree. I want to know what's gratuity and dearness allowance n how do we calculate it.
plz help
jyoti

Hi Jyoti,

Gratuity is paid to an employee out of gratitude by the employer if an employee completes 5 years of continuous service with the organization. Gratuity will be calculated as Basic + DA * 15 * Number of years of service / 26. If an employee completes more than 6 months in a year, it can be taken as a complete year. The employer can stop the gratuity when the employee has damaged any company property or if they are liable for the company. However, the employee must compulsorily complete 5 years of service.

Sirisha

Hi Jyoti,

Please find below some information about Gratuity. It's a bit in-depth, but it should help answer some of your questions on the subject.

Gratuity - Meaning

Gratuity is a lump sum payment made by the employer in recognition of the service provided by the employee upon retirement or termination of service.

Applicability

The Act applies to any factory, shop, or establishment with ten or more employees, or where ten or more employees were employed at any time in the past twelve months. Every employee, regardless of salary, is entitled to gratuity. Once the Act applies, it continues to govern, even if the number of employees falls below ten.

Eligibility

An employee becomes eligible for gratuity after completing five years of continuous service. Continuous service means uninterrupted service during that period.

- On superannuation, retirement, resignation, death, or disablement due to accident or disease.

The five-year condition is waived if employment ends due to death or disablement. Interruptions due to sickness, accident, leave, lay-off, strike, lockout, or cessation of work not due to the employee are not considered breaks in service (Section 4).

Amount Payable

Gratuity is calculated at 15 days' wages for each year of completed service or part thereof exceeding six months. In seasonal establishments, it is 7 days' wages per season. Wages include basic and D.A. For piece-rated employees, daily wages are averaged over three months. The maximum gratuity amount is Rs. 3.5 lakhs.

When Payable

An employee entitled to gratuity must submit a written application to the employer. The employer must determine and notify the amount within 30 days of eligibility. If not paid on time, interest at 10% p.a. accrues. Disputes are resolved by the controlling authority.

Nomination

After one year of service, employees can nominate beneficiaries. In case of death, Form J or K is used by nominees/legal heirs. Payment must be made within 30 days. If no nomination exists, the amount goes to legal heirs or minors, with the minor's share held in a bank until they reach majority.

Forfeiture

Gratuity can be forfeited for misconduct causing damage, offenses of moral turpitude, or failure to vacate employer property. Otherwise, the employer cannot withhold gratuity.

Employer Obligations

1. Notify the controlling authority of establishment details.
2. Display a notice for employees.
3. Determine gratuity promptly to avoid interest.
4. Insure gratuity liability or establish an approved fund.

Penalties

False statements to avoid payment lead to penalties. Employers violating the Act face imprisonment or fines. Complaints are made by or under the authority of the appropriate Government.

Correct me if I'm wrong, but I believe this summarizes the key points about Gratuity. Let me know if you need more information.

There is a Gratuity Act under the labor law, so to know everything, please go through it. It is available online.

Cheers, Mallet

Thank you for the given information. I'm very new to this concept. I just want to know, is it compulsory for all the employees, or can anyone who wants to apply for this?

If a company has only 4 permanent employees, and 2 are retrenched, both with more than 5 years of continuous service, are they entitled to gratuity? The said company is an international franchise.

With reference to the above comments, to be honest, gratuity pay differs among employers. It's not only given for 5 years of service. Some employers extend it to two-year contracts and even pay 21 days of gratuity. For 5 years or more of service, 30 days of pay gratuity will be offered for each year.

That being said, the employee should meet the contract requirements, such as completing the given years in the contract and providing a full 30 days' notice before resigning. Employees who are sacked would not be entitled to gratuity. Additionally, this also depends on the employer.

Hi,

Just wanted to confirm, is gratuity applicable to non-performers as well, or is it applicable only to individuals whose length of service is 5 years and above?