Gratuity Calculation on Gross Salary - decision to be calculated on Basic + DA which is as per law

Previous to May 2018, we had gratuity calculation on Gross Salary, i.e., gross salary * 4.81%, which indicated a higher amount in the CTC. But recently, management has taken the decision to calculate it on Basic + DA, which is as per the law. Now we have a few issues; Employees working for more than 5 years have been affected.

Also, what is the maximum percentage of basic salary calculation? Currently, we have Gross salary * 50% as basic salary and DA is 10% of Basic Salary.

Now as an HR, I am confused about how to handle this issue as everyone's CTC has gone down drastically. Please guide!

Dear Reshma,

First of all, you need not to show gratuity as a part of CTC breakup as it is not payable to the employee before he/she leaves the organization. Secondly, yes, it is right to consider gratuity on Basic + DA. There is no maximum percentage of salary defined for Basic; the only minimum stipulations are there. Thus, you may keep 50% or more also till the time you are meeting with other criteria such as DA should not be less than the specified by appropriate authorities and HRA minimum 5% of basic etc.

Dear Reshma,

Keep Basic + DA at 60% for all staff. Calculate gratuity based on this. At this point in time, the gratuity fund accumulated might be higher. There is no problem in doing it as such. How about the ceiling of the gratuity? ₹10L or actual? Please check on that as well.

This is what we have currently:

First, we did not have DA. Now it's added but adjusted to the same gross salary.

- Basic: 50% of Gross
- DA: 10% of Basic
- HRA: 40% of Basic
- Gratuity: (Basic + DA) * 4.81%
- Gratuity ceiling is at Actual, i.e., 20 lakhs.

Dear Reshma,
The change in Gratuity Formula will affect the CTC, but it will not effect the “In Hand” salary. You can convince the same to the employees. But it is a major concern in respect of people who have completed five year coz their gratuity amount which was due on higher amount now it will drop down drastically, due to change in formula pattern. In such case you can increase the "In Hand" salary for the difference amount. For example we take some imaginary figures for an employee monthly CTC
Monthly CTC Rs. 50,000
Basic Salary+DA Rs. 25,000
Gross Salary Rs. 40,000 (Before deduction on which earlier
Gratuity calculated @ 4.81%)
In Hand Rs. 35,000 (After deductions)
Gratuity amt. Rs. 1,924 (on Gross salary Rs. 40,000)
Now after new pattern Gratuity will be decreased to Rs. 1,203 (on Rs. 25,000). In such cases you can adjust the gratuity difference amt. Rs. 721 (1924-1203) in allowances and increase the “In hand” Salary for those who have completed 5 years.
This is coz their gratuity is due, decreasing the Basic for gratuity means reducing their due benefits. So they must be compensated by increasing the “In hand” salary.
However, those who have not completed 5 years they can be convinced by saying it is not affecting “In hand” salary. Moreover, the new pattern (Gratuity on Basic+DA) is as per Law. Company is bound to pay the minimum wages and benefits which are defined by the govt. through various acts. Over and above is solely company decision.
However, first you need to frame a company policy regarding change in the patter of gratuity calculation. Same should be circulated to all employees. So that it can be produced in case of any future dispute.
Hope this will help you to overcome the situation. Seniors can throw more light on the matter.

Dear Mr. Dangwal,

Thank you for the explanation. Is giving compensation to those who are due for Gratuity applicable as per law? Management will not agree to it. Let me know if there is any other way.

Formula for gratuity is clear: Basic pay + DA is to be used. However, no one stops a company from paying more gratuity if they so desire.

Dear Mr. Nathrao,

Thank you. Yes, the formula is clear.

Regards.

Hi, Reshma,

Are you presuming that management will not agree to increase the salaries of those who have completed 5 years of service unless it is as per law? You can put forward the suggestion that this is as per principles of natural justice, as the employees were promised a different CTC when they joined and would now be at a loss, which could lead to a legal dispute.

Thank you.

Regards,

R. H. Kavarana
HR Manager
Mumbai

As per the law, payment is only made after the completion of 5 years of service, i.e., 4 years + 240 days in the 5th year of service. The calculation should be done based on Basic+DA instead of the gross salary.

Thanks & Regards,

Sumit Kumar Saxena