Gratuity Payment Confusion: Did We Misinterpret the 240-Day Rule? Seeking Advice from Experts

Dear Seniors, we have paid gratuity to an employee of our company after continuous service of 5 years. He worked with us from 01/08/2012 to 08/06/2019, and gratuity is part of the CTC in our company. Our auditors raised a question that we have not followed the 240-day system. They mentioned that if an employee has not worked 240 days in a year, then he is not entitled to gratuity payment. We have paid gratuity based on continuous service of 5 years without a break, as gratuity is part of the CTC.

Please provide your valuable suggestions.

Thanks

Query of the auditor is not clear.

He has worked for more than 5 years. Are there breaks in service??

Gratuity being part of CTC is not relevant. Kindly provide year-wise days of service and whether any breaks in service etc have taken place, though you mentioned continuous service.

What is the meaning of Basic wages under the Payment of Gratuity Act?

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Basic wages under the Payment of Gratuity Act refer to the salary or wage paid to an employee, excluding any allowances, bonuses, or other additional payments. It is the core component of an employee's compensation package and is used as the basis for calculating gratuity benefits. Basic wages are essential in determining the gratuity amount that an employee is entitled to receive upon completion of their continuous service as specified under the Act.

How to Calculate Gratuity:

The amount of gratuity is directly proportional to the tenure of service and the last drawn salary. Gratuity is given at the rate of 15 days of the last drawn salary for each year of service. The salary considered for the calculation of gratuity includes basic pay and dearness allowance. It is typically calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26. According to this formula, a time period of over six months or more is considered as one year. This means that if you have completed five years and seven months of service, the number of years would be considered as six years for the calculation of gratuity benefits. On the other hand, if the service period is five years and five months, the gratuity calculation will be considered as five years.

basic wages” means all emoluments which are. earned by an employee while on duty or [on. leave or on holidays with wages except HRA and OT allowance. bonus allowance etc..hence gratuity calculation should be done on gross salary after deducting HRA OT and bonus allowance.