Gratuity Confusion After Service Extension: Should It Be Based on 2022 or 2024 Pay?

I have been working in an MNC since February 2008 and retired on December 2, 2022. My company extended my services, and the letter states, "Your service contract is extended till December 2, 2024, and all other terms and conditions of your services shall continue to govern."

As per the gratuity rule, 50% of the employee's CTC is basic pay, and the remaining 50% comprises employee allowances. All employees' basic pay was revised in April 2023. However, HR is now saying, "Gratuity – till 58, your actual retirement age, it is accumulated in a trust/LIC and shall be paid what is accumulated and your last basic year (2024) till your actual superannuated year."

Kindly advise whether I should receive the gratuity based on the basic pay of 2022 or 2024. Can you please provide your legal advice?

With regards

Gratuity Entitlement and Computation

You are entitled to receive gratuity based on the salary you draw at the time of your actual relieving. If you remain until December 2024, the gratuity should be computed according to the salary of December 2024 and not according to the salary of your superannuation date, i.e., December 2022. If the gratuity is maintained in trust, LIC may pay gratuity based on 2022, but the difference amount should be paid by the company.

Understanding Gratuity Calculation Under the Payment of Gratuity Act

There is no rule under the Payment of Gratuity Act that gratuity should be computed on 50% of CTC. Under the Act, wages mean total emolument, and the only exclusion is for house rent allowance, overtime wages, commission, etc. Of these, HRA is excluded from the scope of wages only if it is paid as compensatory allowances, and that also to those employees who reside in leased accommodation and is not available to those who reside in their own houses or when the spouse is in receipt of HRA. Please follow the link for further reading.

http://madhu-t-k.blogspot.com/2024/0...lary-some.html

The above article is all about the computation of gratuity, and these are my observations only.

Technical Fault in Gratuity Payment

It is a technical fault. Your gratuity is controlled by LIC/Trust. Probably in your Trust deed, it is mentioned to pay a contribution up to the normal retirement age, i.e., 58. Had it been that you retired at the age of 58 and settled all your dues and then had a separate extension of 2 years, then you would not be eligible for gratuity until 2024, as the extension job is only for 2 years.

In this case, the organization, by a technical mistake, extended your service for a further 2 years without any break and probably without cross-checking the Trust rule, which has caused your demand for gratuity up to 2024 instead of 2022.

You can appeal to the controlling authority under the PG Act for your claim.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons]

As per the communication from your company, "your service contract is extended till 2nd Dec '2024, and all other terms and conditions of your services shall continue to govern."

Based on this, in December 2024, you should be entitled to payment of gratuity for 17 years (16 years 9 months rounded off to 17 years). Your last basic salary (Dec 2024) should be considered for the calculation of your gratuity.

Yes, the service until December 2024 will be considered for gratuity. However, I disagree with the computation of gratuity. Nowhere in the Payment of Gratuity Act is it stated that gratuity should be calculated based on the basic salary. Additionally, the Act does not provide a specific definition for basic wage, but wages are defined as total emoluments and not just the basic pay that the employer sets.

I discussed the same with my HR but received the same reply. I am appending below the reply received:

Your actual legal age of retirement is 58 years, and you have already completed the same. Therefore, at the time of your separation, you will receive Gratuity from LIC up to the age of 58 years because our Gratuity is with LIC, and being a Government body, they also follow the Gratuity rules. Post that, you will also receive an additional Gratuity amount as mentioned in the letter for the year 2023-24 and 2024 as well (for the year 2024, you will receive it on a pro-rata basis, and this amount will be paid by the Company).

Kindly advise.

With regards.

Having gone through the responses to your thread, I wish to state that it will depend on the condition mentioned in your letter of appointment relating to Gratuity. Unless we read this condition, it would be inappropriate for me to comment on this.

Gratuity and LIC Agreements

Some companies enter into an agreement with LIC, and based on an actuarial valuation, the company pays the amount demanded by LIC every year. The gratuity payout will be dependent on the age of superannuation (58 years).

However, if the company pays a risk premium, LIC pays gratuity to a deceased employee's kin, a sum considering service till his/her age of superannuation (58 years), even if he/she dies several years before superannuation.

Gratuity Without LIC Agreements

Some organizations do not have an agreement with LIC, and they generally pay gratuity to their employees based on the actual date of retirement beyond superannuation if applicable.

Regards,

MVK

Gratuity Payment Interpretation

The HR department is incorrect in interpreting the Gratuity Act. It is acceptable that LIC will pay the amount calculated based on the superannuation date (not the retirement date) as mentioned in the policy. Since the date of superannuation as per the policy you have purchased is 58, LIC's liability will end by issuing a cheque for the amount computed based on service until the age of superannuation, i.e., 58. However, since the employee's service has been extended until December 2024, the employer is obligated to pay gratuity only when the actual retirement occurs, i.e., December 2024. Otherwise, the employer should have settled the gratuity amount at 58 years and then issued a fresh appointment order for the period following it. There should not be any wording to suggest that the service conditions will remain unchanged. At least in the letter, there should be something that indicates the service is interruptive.

Arrangement with LIC

Another important point is that the arrangement with LIC is to make funds available, and it is an arrangement between the company/employer and a third party, LIC, and for the employees, it has no relevance. What is relevant for the employee is receiving gratuity when they actually retire.

Relevant provisions of the Act are reproduced here for proper understanding:

THE PAYMENT OF GRATUITY ACT, 1972

2. Definitions.—In this Act, unless the context otherwise requires,—

xxxxx

(s) “wages” means 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.

4. Payment of gratuity.—(1) Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,—

(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:

7[4A. Compulsory insurance.—(1) With effect from such date as may be notified by the appropriate Government in this behalf, every employer, other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government, shall, subject to the provisions of sub-section (2), obtain insurance in the manner prescribed, for his liability for payment towards the gratuity under this Act, from the Life Insurance Corporation of India established under the Life Insurance Corporation of India Act, 1956 (31 of 1956) or any other prescribed insurer:

xxxxx

(2) For every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of fifteen days’ wages based on the rate of wages last drawn by the employee concerned:
Provided that in the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account: xxxx

Unquote:

Here two questions are raised - 1) Wages (salary) for computation of gratuity and 2) the length of service for determination.

So far as the salary is concerned, there is no clarification whether the salary for the extended period will be continued on the same scale at the time of extension, i.e., 58 years OR to be refixed for the 59th & 60th year.

Secondly, it may be appropriate to compute the gratuity reckoning the extended period, i.e., 60 as 'continuous service' without a break.

The question of who pays the additional funds is presumed to be partly answered by the employer (which is over and above what is to be paid by LIC).