Gratuity Calculation Confusion: Should We Use CTC Basic or Last Month's Payslip?

Gratuity Calculation: CTC vs. Payslip Basic

(Last drawn basic / 26) x 15 x number of years of service. The "last drawn basic" refers to either the last month's payslip basic or the basic mentioned in the CTC. Is the basic taken from the CTC or the monthly payslip for calculating gratuity? Do all MNC companies follow the same rule for gratuity regarding which basic they consider, payslip-wise or CTC basic?

Impact of Loss of Pay on Gratuity Calculation

If an employee was on loss of pay for half the month, their salary will obviously be reduced, and the basic in the salary slip is also reduced. When the employee decides to quit, what basic should we consider—his last month's payslip basic or his actual basic in CTC, irrespective of the monthly basic?

For example, if the actual basic per CTC is 30,000 and the last month's basic according to the payslip is 15,000 (due to loss of pay), which one should we consider, 30k or 15k? Please help.

There is no doubt that employee's gratuity should be calculated based on their actual basic salary, which is 30,000/-.

Hi Bharani, it's not always the same as what you described. LWP (leave without pay or leave on loss of pay) does not necessarily result in a downward revision of pay. A firm's leave policy might allow LWP for various reasons, thereby providing for the purpose without reducing the emoluments if the leave availed by the employee is authorized. However, if it does result in a reduction as described per the policy, different from others, no one can interfere. It's known that when such LWP is availed, normally no increment is granted or forfeited for the period on LWP (NOT ACTUALLY WORKED), and he/she may be permitted to rejoin where he/she left. This type of leave also does not normally result in a 'break-in-service'. If you indicate the pertinent policy in vogue, it may be possible for me to give my views on it.

Last Drawn Basic + DA/26 * Number of years of service completed. More than 6 months of service should be considered as one year.

Hi,

"Last drawn basic" means the last basic salary awarded to the employee as per their last appraisal letter. Please do not refer to the initial CTC according to the appropriate order.

If he had not attended work for the whole month, would you consider the Gratuity as zero? The calculation should be based on the last drawn (full) Basic+DA salary: Basic+DA x 15/26 x Number of years of service (more than 6 months of service should be treated as 1 year).

Basic Salary + Variable Dearness Allowance fixed, if any, by the company should be taken for the purpose of calculating Gratuity. It is not the basic salary and VDA earned in that particular month in which the employee last worked. Hope this is clear to you.

There are two concepts - Notional Salary and Actual salary. Notional salary is the salary fixed for any employee for a specific period as per the terms and conditions of employment. Actual salary is actually earned by any employee in a particular month, which may be more or less than the Notional salary - more (for OT) or less (for LWP).

Gratuity should be calculated based on the Notional Salary, not on the actual salary.

S K Bandyopadhyay (WB, Howrah)

Definition of "Wages" Under the Gratuity Act

Section 2 of the Gratuity Act reads as follows: "Wages" means 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, including dearness allowance. This definition excludes bonus, commission, house rent allowance, overtime wages, and any other allowance.

Continuous Service Under the Payment of Gratuity Act, 1972

Section 2A Continuous service: An employee is considered in continuous service if there has been uninterrupted service for a period, including interruptions due to various reasons such as sickness, accident, leave, absence without leave, lay off, strike, lock-out, or cessation of work not due to the employee's fault. This includes service both before and after the commencement of the Act.

Where an employee (excluding those in seasonal establishments) is not in continuous service as per clause (1), for a period of one year or six months, they shall be deemed to be in continuous service under the employer. The specific conditions for this determination are outlined.

For the purpose of clause (2), the number of days worked includes days of lay-off, leave with full wages, absence due to work-related temporary disablement, and maternity leave for female employees, with a maximum of twelve weeks.

Understanding Key Terms Related to Gratuity

Individuals involved in gratuity should have a clear understanding of 'wages,' 'continuous service,' 'break-in-service,' etc. Leave without pay (LWP) does not constitute a 'break-in-service' for calculating continuous service or reducing entitlement to emoluments or salary rate. The emoluments of an employee on LWP remain unchanged, ensuring entitlement to gratuity based on the original salary rate.

Even if an employee has not worked a single day during a salary month and has a zero take-home pay, they are still entitled to gratuity at the standard salary rate (Basic + DA). This situation does not necessitate considering it as 'Notional pay,' as the entitled 'wages' remain unaffected. Therefore, LWP does not impact wages for gratuity, subject to the specified conditions.