Understanding Retirement Increments: Should They Affect PF and Gratuity Calculations?

Our company has a policy defined for retirement increment at a fixed percentage for white-collar employees. This amount is provided to the employees at the time of retirement, and hence the last drawn payslip will not reflect this amount. However, the increment amount is considered for the calculation of Gratuity settlement as well as leave encashment. Since the increment is not part of the payslip, PF is not deducted on such retirement increment.

Gratuity Act and Retirement Increment

As per the Gratuity Act, the last drawn basic pay would be the basis of settlement for calculating the amount for the completed years of service. Under such circumstances, can we say that the retirement increment added to the basic is the last drawn wage, and if so, can PF authorities not question the exclusion of the same in the payslip and demand to remit PF on such increment?

Different Calculations for PF and Other Benefits

Can the last drawn wage be different for PF and for other long-term benefit calculations such as Gratuity, Leave encashment, etc.?

Kindly clarify as the Company feels that the retirement increment is only an internal policy, and there is no need for inclusion in the last drawn payslip and deduction of PF on the same.

What do you mean by increment?

Is it not an annual increase in the salary? Normally, the salary of an employee will increase due to two reasons: one, to compensate for the increase in the cost of living, and second, to reward performance. This increase should be evidenced in the pay slips, and it should be considered for deciding PF contributions as well. Of course, if your company is limiting the PF contribution at Rs. 15,000, which is the statutory amount beyond which the employer 'need not' contribute, and if the salary is even above that, the annual increment will not reflect in the PF contribution. Then what is the purpose served by not showing the increment in the pay slip? I don't understand.

The Payment of Gratuity Act and basic wages

The Payment of Gratuity Act has not defined the term basic wages but only said that wages mean 'all emoluments payable as per the contract of employment'. It has been misinterpreted as payable on basic wages and dearness allowances. In new-generation companies, it is paid on basic salary alone because they don't pay any dearness allowance. But that is not right. Anyway, that is out of the present discussion.

What is Retirement increment?

If that is given to an employee at the time of retirement as a gift, then it is purely an internal policy. But it needs clarification for further inputs from our side.

Thank you for your immediate response.

To clarify further, the PF deduction is not restricted to Rs. 15,000 but applies to the actual basic wages of the employee as reflected in the wage records from time to time. In other words, the company is remitting the PF of 12% on the latest basic salary of the employees and not restricting any ceiling.

With respect to the retirement increment, it is given to employees and applied as a percentage on the last drawn basic wage for their performance during the year of retirement.

The question here is whether the company can increase such basic with the retirement increment policy and apply it only on gratuity and leave encashment calculation without recording the same in the wage records of the company. In other words, without reflection in the last drawn payslip, can it be used for calculations of gratuity and leave encashment alone, and if so, will the PF authorities not object to the non-disclosure and non-deduction of PF on such increment?

Hope I have clarified further.

The legal requirement is that the wages as per the wage slip have to be paid. If something more is paid, it is a voluntary welfare measure, and the employer cannot be questioned. Since, as you said, the PF deduction is on actual wages, not limited to the Rs. 15,000 basis, there cannot be any objection from the PF side for such additional payment. Since the calculation basis for gratuity and leave encashment is a higher amount, no illegality is observed.

PF Contribution on Wages Above Rs 15,000

As far as PF authorities are concerned, they have no right to demand a contribution on wages above Rs 15,000. Since you are paying it on wages above Rs 15,000, the contribution can be on any amount. In the year of retirement, if you pay it on the pre-revised basic salary, the authorities cannot question it. However, it is fair if you show the revised basic salary on the payslip because it will provide clarity on how the calculation of gratuity and leave encashment is made.

Calculating Gratuity and Leave Encashment

Any method of calculating gratuity or leave encashment that is more beneficial to the employee is allowed. Therefore, if you don't show the increased basic salary in the payslip, no illegality arises as long as the calculated amount is higher than the one calculated as per the payslip amount. Nevertheless, it is advisable to have some evidence, such as an office order, to demonstrate that the gratuity and leave encashment (at the time of retirement) will be calculated by adding a service weightage of a certain percentage increase in basic pay. This practice is fair and will help avoid confusion.