Gratuity Confusion: Is One Month's Gross Salary Due for Each Year of Service?

One of our employee contracts mentioned the Gratuity clause as "Gratuity - You will be paid one month's salary for every completed year of service as per the gratuity act." How much is he eligible to get as gratuity after 6 years of service in the company? (Gross Salary breakup: Basic 50%, DA 10%, HRA 20%, other allowances 20%).

Is the employee claiming a one-month gross salary to be paid for 6 years? Is the employer claiming that the Gratuity Act applies only?

Please clarify which interpretation is correct.

Hi,

As per the Gratuity Act, the payment of gratuity will be at the rate of 15 days' wages (which means Basic + DA) for each completed year of service. The formula for gratuity calculation will be: Last drawn Basic + DA x 15/26 x number of years completed. As per your contract of employment order, which states "as per Gratuity Act," hence payment as per the Gratuity Act would be sufficient. However, the use of the term "one month's salary for every completed year of service" has led to this confusion. In the letter of the contract, is there any definition given for "one month's salary" as one month Basic?

Based on the appointment letter, there are chances of employees claiming one month's salary for each completed year of service.

Thank you for your reply.

It is confusing. Nowhere is it mentioned that one month's salary should be considered as basic + DA in his appointment letter. The appointment letter generally does not specify anything like "either Gratuity Act applies or one month's salary."

Based on the Gratuity Act, the employer provides gratuity based on the formula of "Basic + DA x 15/26 x Last drawn salary x 6 years."

However, the employee is stating that "one month's salary as per Gratuity Act should be calculated as 'Basic + DA x Last Drawn salary x 6 years'."

Many organizations include unnecessary statements, which can lead to confusion and additional costs for the company.

Clarity in Policy Statements

Wherever possible, simply state "As per the Act," such as "Gratuity shall be payable as per the Act," to ensure clarity.

Defining Salary in Policies

As you mentioned one month's salary, it's important to determine whether you have defined what constitutes a salary and what is considered gross salary in the policy or salary breakup. If specified, you can follow the same definition; if not, you need to pay based on the total salary. Additionally, it is mentioned as one month's salary for completed years, but the Gratuity Act specifies 15 days' wages only.

Higher Benefits and Tax Implications

Even though the Gratuity Act allows for higher benefits to the employee if specified in the contract or policy, any higher benefits paid beyond the statutory benefits will attract income tax.

Hi, I suggest you release gratuity as per the Gratuity Act (Basic + DA) and explain to the employee that they are being paid according to the Gratuity Act. You may try to convince them. If they decide to appeal before the Assistant Commissioner of Labour, you will need to justify that you have paid according to the Act, but it was erroneously mentioned in the Appointment Order.

Gratuity Calculation: Understanding the Components

Gratuity is payable on the total emoluments and not simply on the basic salary or basic salary and dearness allowance. Nowhere in the Act is it stated that gratuity is payable on the basis of basic + DA. There are some exclusion parts in the definition of wages which include HRA. Even the HRA, if part of the salary, cannot be excluded from the salary if it is paid to all the employees irrespective of their residential status, whether they reside in their own house or leased houses.

The above is a question of law, and hence we can forget about it now. Here in the instant case, the appointment order says that the employee is eligible for gratuity equal to one month's salary per completed year of service. Unless otherwise mentioned, the salary shall include all components of salary as per the same appointment order. If the appointment order has shown salary with different components like basic, dearness allowance, HRA, etc., and under the provision for gratuity, it is stated that gratuity would be 30 days of basic and DA for every completed year of service, it would have been clear. But it is one month's salary. Salary should mean salary inclusive of all allowances. You should include all fixed allowances.

Hi, is there any calculation for gratuity in case of an employee's death?

Hi, the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death.

The same calculation applies to death cases as well, i.e., 15 days' pay for every year of service until death. If you have purchased any death cum gratuity policy from LIC, then LIC may calculate it projected to the retirement year.

As per the original post, one month's salary for each completed year of service is to be paid as per the Payment of Gratuity Act. It is confusing. In my opinion, if we read between the lines, it is one month instead of 15 days as per the PG Act.

Gratuity Payment Basis

Now, whether it will be paid on Basic & DA or monthly gross. As per the PG Act, it should be paid on Basic & DA, not on monthly gross, which is practiced by all organizations throughout India. Even in the new labor codes, it is on wages (Basic & DA).

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To strive towards excellence with effort and integrity

There are many companies that pay gratuity of 30 days' salary instead of 15 days. This may be in accordance with the employment contract or settlements with unions. Such agreements typically define what constitutes wages. However, I am unsure where in the Payment of Gratuity Act it is explicitly stated that gratuity is only payable based on basic wages and dearness allowance. Where is basic wages defined in the Act? The Act defines wages as the "total emoluments" earned by an employee, including dearness allowance. Exclusions are made for commission, overtime wages, House Rent Allowance (HRA), bonus, or other similar allowances. Despite this, many establishments only calculate gratuity based on basic salary and DA.

In many modern companies where DA is not a part of the payment structure, gratuity is calculated solely on basic wages. This practice seems unfair and contrary to the law. It appears that legislators did not anticipate that employers would interpret the law in a way that could lead to misuse. Consequently, the pay structures in new generation companies tend to allocate the minimum amount to basic pay and a higher portion to HRA and "other allowances".

(Sorry for the extended discussion, as I am currently involved in a case concerning a similar issue before the Controlling Authority. I will provide further details later.)