Gratuity calculation on Basic - are we wrong in computing gratuity from the date of joining?

Hello,

My organization has been contributing Gratuity as part of CTC from the date of joining. The way of calculation of Gratuity has been Basic X 15/26. This was accepted by the employee at the time of joining. However, the employee has now expressed his displeasure for the same as he is losing an amount of Rs 5000 if the gratuity is calculated for the last drawn salary X 15/26. He also cites that since his joining, his Basic has gone up 37% in the last 6 years. I would like to know if we are wrong in computing gratuity from the date of joining.

Please advise.

Dear Madam,

As per the Gratuity Act, the calculation is Basic + DA * 15 * Number of Services / 26. How did he lose Rs. 5000/-? Could you elaborate for my understanding? Gratuity must be calculated from the first day of joining.

Regards, Manjunath S B

Dear Sir,

Please consider the following calculation attached as an image.

Regards,

Anuradha

Gratuity figure while calculating CTC (No legal stand) is a notional figure, not the actual figure. When an employee becomes eligible for gratuity, it should be paid based on the last drawn Basic or Basic+DA. Therefore, the calculation shown is not correct. Monthly gratuity values are notional, not actual.

Please let me know if you need further assistance.

Dear Bandyopadhyay,

Is this notional calculation of Gratuity prohibited as per the act? If so, is there any penalty for doing so? Please do let me know.

Regards,

Anuradha

I would like to know if you are from HR or from some other function?

I am not sure if you read the attachment properly or whether you wrote your query wrong.

The gratuity part on CTC comes to ₹ 89,000 while the actual gratuity that will be paid comes to ₹ 94,000. So how exactly does the employee lose? The company loses, not the employee. He or She is getting paid ₹ 5,000 more than what is computed as per her CTC.

Dear Anuradha,

As per the Payment of Gratuity Act, gratuity has to be paid based on the last drawn salary, not on each year's gratuity, and then added on the basis of each year's different basic. Calculating gratuity on a yearly basis simply violates the guidance of the Payment of Gratuity Act.

Thank you.

As rightly said by Nanu, gratuity has nothing to do with salary at the time of joining and subsequent increments given, but it is based on the salary of the employee at the time of exit. I also believe that gratuity should be calculated on the basis of total salary and not on basic salary alone. Allowances which do not form part of salary should only be excluded from it. Allowances which do not form part of salary means such allowances that will be paid irrespective of attendance or whether the employee is on leave or not, like house rent, which is paid to some employees who stay in rented houses for meeting the interests of the company, education allowance, which is paid to those who have children undergoing some studies, telephone allowance to some employees who use personal telephone for company business purposes, etc.

Here what is important is "some" employees. If you have an HRA or education allowance or telephone allowance as part of your salary structure and it is paid to all employees irrespective of whether they stay in their own houses or whether they are asked to stay near the company or not, or whether the children undergo any courses of study or use the telephone for official purposes, as the case may be, the same will be considered as part of the salary. Obviously, in case of leave without pay, you will make a proportionate deduction of HRA, education allowance, or telephone allowance while making salary payment.

Saswata,

Have you read my query and understood it, as you claim to be an Auditor?

How is the company losing and the employee gaining? Can you explain your stand with calculations to support your presumptions?

Anuradha

Dear Ms. Anuradha Grewal,

Statutory gratuity is a future payment based on the length of past service rendered in the establishment by the employee in the event of his exit, and the factor for calculation is the last drawn wages by the employee. Here, the last drawn wages are not only what is actually drawn in the last month but also the rate at which it is payable. Thus, it is clearly evident that gratuity under the Payment of Gratuity Act, 1972, is a one-time lump sum payment payable by the employer to the employee on the termination of his employment and as such it requires no contribution from the employee other than blemishless and continuous service under the same employer.

Of course, the Act encourages the employer to constitute a gratuity fund or compels them to take up an insurance policy towards this future liability under section 4-A of the Act. The calculation for this is normally on an actuarial basis at 4.81% of the wages. However, the amount to be realized under this arrangement shall not be less than the actual amount of gratuity payable at the end of service. So, you can add up a sum equivalent to 4.81% of the wages every year to the gratuity fund, which can be a part of the CTC in respect of the particular employee, and this cannot be deducted from his basic wages. In the given case, the employee is entitled to a sum of Rs. 1,134,630.00 on his exit after a service of 7 years in the establishment.

Therefore, your calculation is erroneous from the very beginning as you start from the sum of CTC, which is nothing but an accounting tool to assess the overall cost per employee per annum and is in violation of section 4(2) of the PGA, 1972. In case of a dispute by the aggrieved employee, you would be compelled to pay the difference with 10% simple interest with effect from the date it becomes payable.

Dear Mr. Madhu,

I am a bit confused by your post regarding the definition of the term 'wages' for the purpose of the calculation of gratuity under the PGA, 1972. Maybe your interpretation is based on "the doctrine of universality" applied by the Apex Court recently on the interpretation of wages under the EPF Act, 1952.

To me, the definition of wages under section 2(s) of the PGA, 1972, is clear, unambiguous, and not disturbed by any other subsequent provision of the Act leading to another possible interpretation, if any. The definition can be divided into three parts: one, the defining part; two, the inclusive part; and three, the exclusive part. Wages mean all earned emoluments while on duty or on leave. Wages include dearness allowance. Wages exclude bonus, commission, house rent allowance, overtime wages, and other allowances. Therefore, it is clear that for the purpose of gratuity calculation under the Act, only the sum of the last drawn basic wages and dearness allowance should be taken into account.

In the definition, other allowances shall include allowances not forming part of wages but within the terms of employment. In private companies, however, other allowance is an allowance paid to all employees and is the residue left after appropriating the least of the gross wages to Basic Pay and then to HRA, and then to Conveyance, etc. In private companies, 'other allowance' forms the biggest component. Interestingly, when you take a leave, all these components will get deducted. It is not simply Basic wages that are subjected to deduction, but the entire emoluments are proportionately reduced.

In many organizations, the basic wages will remain unchanged every year, but in their increment letter, they increase HRA and other allowances. When basic pay (fixed by the employer) is the salary that qualifies for gratuity, why there is no annual increment in it is a question generally asked by blue and white-collar employees.

The definition of wages under Gratuity Act is more or less similar to what is given in the Provident Fund Act. Under the PF Act, basic wages mean gross salary. The exception is available only to HRA, which is paid separately and not forming part of the salary but within the purview of service agreements.

I believe that for an employee, what is salary is the total sum, and the bifurcation is done by the employer. As such, what an employee agrees to is the total salary and not the compartments involved in it. My perception about gratuity qualifying salary is centered on these elements.

In the public sector, there is a definite pay structure with a Basic component, DA varying according to changes in the CPI, allowances like HRA which are paid as per the city of residence, category of employees, and other parameters. Private companies do not have such basic pay scales. They fix the lowest amount as basic salary and generally take 40% or 50% of the gross salary as HRA on the presumption that Income Tax authorities permit such a calculation. The calculation of income tax is different, and it is not based on gross salary. Moreover, for deduction for absence from duty, gross salary is the salary agreed, and for contribution or payment of gratuity, the basic pay is the agreed salary. For me, what is deducted as one day's salary in case an employee takes a leave is the salary due to him for all purposes. If we allow accepting a broken-up salary for the purpose of statutory contributions, the gratuity which a daily-rated casual worker gets will be far higher than a monthly-paid manager!

Saswata,

Have you read my query and understood it as you claim to be an Auditor?

How is the company losing and the employee gaining?

Can you explain your stand with calculations to support your presumptions?

Anuradha

Anuradha, I have read your post, and I do not understand your query. If you look at the attachment you have posted, you are computing gratuity at 4.8% of salary as a part of CTC. The total of 5 years is ₹ 89,542. If you consider the CTC as the money the employee gets for his work (which technically is wrong), it means the employee is due that amount. Another way of thinking is that out of his CTC, ₹ 89,542 is deducted over the years (since it is not paid to him).

At the end when the employee leaves, he is getting ₹ 94,553. What was 'deducted' is ₹ 89,542.

Now, please tell me who is gaining and who is losing? Please tell me how the employee thinks he is losing ₹ 5,000.

If it is written in the appointment letter that the payment of gratuity shall be as per the Payment of Gratuity Act 1972, then the gratuity will be payable only after completion of 5 years of service, that too at the last drawn salary of the employee. Otherwise, if the employee has not completed 5 years of service, then the gratuity would be payable as per CTC, i.e., at the rate drawn by the employee from time to time.

- S. K. Mittal
Industrial & Labour Lawyer
9319956443

All 'other allowances' though part of terms of employment are excluded in the definition of wages in the POG Act.

Allowances uniformly paid to all employees should be part of wages/salary. I repeat that if these "other allowances" are considered for deduction in proportion to the days an employee remained on leave without pay, they should be part of wages/salary for all purposes including gratuity.