Confused About Gratuity Calculation for 9.5 Years of Service – Which Amount Is Correct?

Dear Seniors,

I am calculating the gratuity for an employee who has completed 9.5 years in a company. His basic salary is 21,078/-, and the amount is coming around 109,443. However, a few calculators are showing that it doesn't come under the Gratuity Act, and I am recalculating the amount, which is 94,851/-. Could you please suggest which one is right?

Hi, The gratuity amount of Rs. 109,443 is correct for 9.5 years of service (last drawn Basic * 15/26 * 9 years).

The gratuity cannot be less than Rs 109,443 because, for a service of 9 years (ignoring the fraction of six months to make it 9.5 years, assuming that 0.5 years is not 5 months but 1/2 of the year) with a basic salary of Rs 21,078, it cannot be Rs 94,851. Now, if the employee had at least ONE DAY in excess of six months, then the gratuity amount would become Rs 1,21,604, because 9 years, 6 months, and 1 day would make it rounded to 10 years.

Gratuity Calculation Basis

You have taken the basic salary alone for the calculation of gratuity. Why? Is there any provision under the Payment of Gratuity Act that gratuity should be calculated on basic salary only? What is the definition of wages under the Payment of Gratuity Act? Nowhere in the Act is there a mention of basic salary/wages, but as per section 2(s), “wages mean all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages, and any other allowance.”

Exclusions in Gratuity Calculation

It is true that there are some exclusions like bonus, commission, house rent allowance, overtime wages, and similar other allowances. House rent allowance is a compensatory allowance paid to those employees who reside in leased houses, and if it is paid universally to all employees without any reference to whether the employee is residing in a leased house or not or without reference to whether the spouse is getting HRA or not, it will not qualify for exclusion. Still, for a defense, you can say that it is excluded from the scope of wages. If it is accepted also, what about the other allowances that pay? Allowances similar to overtime, bonus, etc., shall be excluded, but those allowances like "special allowance" cannot be excluded, anyway. However, all the establishments pay gratuity on basic pay that they fix and the dearness allowance as applicable.

Salary Structure and Gratuity

Again, 90% of private companies do not have DA in their salary structure! Certainly, they will give a salary increase also every year. Then the question will arise, why should an employee be given a salary increase every year? The answer is to "reward the performance and to compensate for the cost of living." These are reflected in basic salary and dearness allowance and not under any allowance. If you put it under any other head, certainly that head will come under the scope of wages. This is my observation about gratuity qualifying salary.

Hi, According to the Gratuity Act, based on an employee's basic salary of Rs. 21,078, the calculated gratuity amount should be Rs. 1,09,443, not less than this. DOJ and DOL are missing in your question.

Hello Sir, As per your details, 9.5 years means he has completed 9 years and 6 months. If he/she completed 6 months, as per gratuity rules, we have to convert it into 1 year. So, in this case, 9.5 years will be calculated as 10 years.

The calculation will be as follows:

Basic X 15 X years of service
= ---------
26

21078 X 15 X 10
= ---------
26

Answer: 121603.84/-

Only more than six months of service are rounded off to one year, not exactly six months.

Yes, had it been just one day more than six months, then only it would be rounded off to the next number.

Please take note of the provisions of the Payment of Gratuity Act concerning "Wages" and the components covered therein, including the rounding of payable service for "one year and part thereof over six months" and "continuous service."

Section 2-(s) of the Payment of Gratuity Act, 1972

"Wages" means all emoluments earned by an employee while on duty or on leave as per the terms and conditions of employment, paid or payable in cash, including dearness allowance but excluding bonus, commission, house rent allowance, overtime wages, and other allowances.

Section 4. Payment of Gratuity

Gratuity is payable to an employee upon termination of employment after rendering continuous service for not less than five years, on superannuation, retirement, resignation, death, or disablement due to accident or disease. Continuous service of five years is not required if termination is due to death or disablement.

Explanation

Disablement refers to an incapacity that prevents an employee from performing their pre-injury or pre-illness work.

Regarding the computation of completed, continuous service, it is essential to consider the stipulations outlined in Section 3(2A) of the Act.

Payment of Gratuity

Gratuity is payable upon termination after five years of continuous service, with provisions for different scenarios like superannuation, retirement, death, or disablement. Various rules apply to calculate gratuity based on the duration of service.

Explanation

For monthly rated employees, the calculation of fifteen days' wages is based on dividing the monthly rate by twenty-six and multiplying by fifteen.

Please let me know if you need further clarification or assistance.