Understanding Gratuity Calculations: Why 15 Days and Which Basic Salary to Use?

1. Do we need to use the total earned basic till the last served month, or is it a fixed basic as per his/her latest CTC?

2. Why do we need to multiply the per day rate of gratuity by 15 days and then by the year? I mean, why 15 days? What is the logic behind it?

For Gratuity, you have to follow this logic. If P is the number of years of service in a company and Q is the last drawn salary (i.e., Basic Salary + Dearness Allowance), then Gratuity = P x Q x 15/26; 15 represents wages for 15 days and 26 represents the total days in a month.

Consult me,

You are not aware of the calculations. If we calculate gratuity as per your formula, the employee will receive gratuity at a quotient of 15/26, which actually works out to half of the entitlement. The formula is: P*Q*15 days*30/26.

Fifteen days mean half a month as per the act; there is a question of logic in the law.

Definition of Wages under the Payment of Gratuity Act 1972

As per the Payment of Gratuity Act 1972, wages are defined as all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of employment, paid or payable in cash. This includes dearness allowance but excludes bonuses, commissions, house rent allowance, overtime wages, and any other allowances. Essentially, it is determined as the sum of basic pay and DA.

Understanding CTC and Its Components

CTC is broader and encompasses amounts not actually paid to the employee, such as the cash value of leave, employer's contributions to PF, ESI, Gratuity, etc. Therefore, CTC cannot be used.

Calculation of Gratuity

Regarding the calculation of Gratuity, the legal provision states, "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." Thus, it should be monthly wages divided by 26 and then multiplied by 15. There is no requirement to involve 30 in the calculation. The formula would be P*(Q/26)*15.

Please let me know if you need any further clarification or assistance.

Regarding the first question of the post, I think that the answers already given by our learned members are quite sufficient and need no more elaboration. Still, the only point that I would like to emphasize is that the poster should make a thorough reading of the existing threads on the web pertaining to the concept of CTC and have the right understanding that CTC is just an accounting tool to assess the overall annual expenses incurred per employee from only the employer's perspective and has nothing to do with the actual statutory payouts to the employee.

Understanding the 15-Day Gratuity Calculation

Now, as regards the second question, Section 4(2) of the PG Act, 1972 lays down that for every year of completed service or part thereof in excess of 6 months, the employer should pay gratuity to an employee at 15 days' wages based on the rate of wages last drawn by the employee concerned. That could be the simplest answer to the question of why 15 days. If we delve deeper into the logic or reason behind this statutory dictate, we should accept that wages are the consideration for the work done by the employee and it can be in cash or kind or both. Furthermore, the measurement of the work can be in terms of the quantity of work done or in terms of the time spent by the employee to do the work. Again, time can be measured in terms of hours, days, months, or years. The most convenient unit of measurement of time for any work done by an employee would be "the day" only in respect of the modes of wage payment contemplated in the first and second proviso of sec. 4(2) of the Act.