Gratuity and Basic Salary Changes: How Should HR Handle the Impact on Employee CTC?

Gratuity Calculation Change

Prior to May 2018, we calculated gratuity based on Gross Salary, i.e., gross salary * 4.81%, which resulted in a higher amount in the CTC. Recently, management decided to calculate it on Basic + DA, which aligns with the law. This change has affected employees who have been with us for more than 5 years.

Basic Salary Calculation

What is the maximum percentage for basic salary calculation? Currently, we use Gross salary * 50% as the basic salary, and DA is 10% of the Basic Salary.

As an HR professional, I am confused about how to handle this issue since everyone's CTC has decreased significantly. Please guide!

Dear Reshma, first of all, you need not show gratuity as a part of the 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; only minimum stipulations are there. Thus, you may keep 50% or more as long as you are meeting other criteria, such as DA should not be less than specified by appropriate authorities and HRA should be a minimum of 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 the Gratuity Formula will affect the CTC, but it will not affect the "In Hand" salary. You can convey this to the employees. However, it is a major concern for people who have completed five years, as their gratuity amount, which was due on a higher amount, will now decrease significantly due to the change in the formula pattern. In such cases, you can increase the "In Hand" salary by the difference amount. For example, let's consider some hypothetical figures for an employee's monthly CTC:

Monthly CTC: Rs. 50,000
Basic Salary + DA: Rs. 25,000
Gross Salary: Rs. 40,000 (Before deduction on which earlier Gratuity was calculated @ 4.81%)
In Hand: Rs. 35,000 (After deductions)
Gratuity amount: Rs. 1,924 (on Gross salary Rs. 40,000)

Now, after the new pattern, Gratuity will decrease to Rs. 1,203 (on Rs. 25,000). In such cases, you can adjust the gratuity difference amount of Rs. 721 (1924-1203) in allowances and increase the "In Hand" salary for those who have completed 5 years. This is because their gratuity is due, and decreasing the Basic for gratuity means reducing their due benefits. Therefore, they must be compensated by increasing the "In Hand" salary.

However, those who have not completed 5 years can be assured that it is not affecting their "In Hand" salary. Moreover, the new pattern (Gratuity on Basic + DA) is as per the law. The company is bound to pay the minimum wages and benefits defined by the government through various acts. Anything over and above is solely the company's decision.

Company Policy on Gratuity Calculation

First, you need to frame a company policy regarding the change in the pattern of gratuity calculation. This should be circulated to all employees so that it can be referenced in case of any future disputes.

Hope this will help you to overcome the situation. Seniors can provide more insights 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.

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