How Do I Calculate Gratuity with a Basic Salary of 35% of My Total Pay?

Hi, what will be the gratuity calculation if the basic salary is 35% of the in-hand salary for a total salary of 1 lakh? Other allowances contribute 65% of the salary structure (HRA is 50% of the basic, and the rest are special allowance, medical allowance, mobile allowance, and travel allowance). All components are paid the same every month.

Is Wage Code 2022-2023 applicable?

Is the wages calculation different according to the below section?

Section 2(s) - Definition of Wages:

This section defines "wages" as all emoluments earned by an employee according to the terms of employment, payable in cash, including dearness allowance but excluding bonuses, commissions, and other similar allowances.

Your total salary, i.e., Rs. 1 lakh, will qualify for gratuity. The definition of wages as per the Payment of Gratuity Act excludes only allowances similar to overtime allowance, bonus, commission, and HRA. The HRA as part of the salary is not an allowance to be excluded because if it is paid along with salary and paid to all employees without considering whether the employee resides in leased accommodation or not or whether the spouse of the employee is in receipt of HRA or not, it cannot be considered as a compensatory allowance. Moreover, in the Act, nowhere is it said that gratuity should be calculated only on basic salary.

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

The above article examines the scope of wages to qualify for gratuity.

Yes, the Wage Code 2022-2023 (under the Code on Wages, 2019) changes the definition of "wages" for various purposes, including gratuity. This new definition can have a significant impact on gratuity calculations, as it standardizes how wages are calculated across different employment laws.

Key Change in the Definition of "Wages":

Under the Wage Code, "wages" are defined as:

Inclusions:
- Basic Salary.
- Dearness Allowance (DA).
- Retaining Allowance (if applicable).

Exclusions:
- House Rent Allowance (HRA).
- Overtime Allowance.
- Bonus or commission.
- Conveyance allowance.
- Special allowances.
- Employer contributions to provident fund (EPF).
- Gratuity.
- Retrenchment compensation or any other form of ex-gratia.

Important Rule for Allowances:

If the excluded components (e.g., HRA, conveyance, etc.) exceed 50% of the total remuneration, the amount exceeding 50% will be added back to wages for the purpose of gratuity calculation. This ensures that Basic Salary + DA (wages) must constitute at least 50% of the total remuneration.

How This Impacts Gratuity Calculation:

Basic Salary Adjustments:

If allowances (e.g., HRA, special allowance) are high (more than 50% of total remuneration), a portion of those allowances will now be considered as part of "wages" for gratuity calculations. Under this rule, employees with lower "Basic + DA" and higher allowances may see an increase in their gratuity amount due to this adjustment.

Gratuity Formula Remains the Same: The formula for gratuity calculation remains:

Gratuity = (Wages × 15 × Years of Service) / 26

However, the "Wages" definition may now include a portion of the excluded components if allowances exceed 50% of total remuneration.

Example:

Total In-Hand Salary: ₹1,00,000.
Basic Salary: ₹35,000 (35% of salary).
Allowances: ₹65,000 (65% of salary).

Under the Wage Code:
Since allowances (₹65,000) exceed 50% of the total salary, the amount exceeding 50% (₹15,000) will be added back to "wages."

Wages for Gratuity = ₹35,000 (Basic) + ₹15,000 = ₹50,000. Gratuity will now be calculated on ₹50,000 instead of ₹35,000.

Impact:

Gratuity amounts may increase for employees with a low Basic Salary component and high allowances. Employers may need to restructure salary components to maintain compliance with the new definition.

The Wage Code 2022-2023 ensures fairness by mandating that "wages" (Basic + DA) constitute at least 50% of total remuneration. Employers must consider this when calculating gratuity. If your organization adopts the Wage Code, the gratuity calculation will change as explained above.

In my opinion, the wages under the new codes are concerning. Currently, all emoluments as per the contract of employment are considered part of wages. However, when the Codes are enforced, it will depend on certain other allowances. Interestingly, an employee receiving overtime wages in the last month will receive higher gratuity because overtime is also considered one of the allowances, 50% of which will be added to the basic wages. Similarly, in cases where an establishment does not limit the contribution towards EPF at the threshold of Rs 15,000, it must also be included as part of wages for all contributions, including gratuity and PF.

It is surprising that after significant investments in the Codes, the outcome seems lacking. Even sensitive issues like gratuity eligibility for employees with 4 years and 240/190 days of service have not been addressed in the SS Code. The code appears to be a mere replication of existing separate legislations. The Wage Code covers all employees regardless of the salary ceiling of Rs 24,000. Additionally, 300 persons are required to make the employer liable to have Standing Orders, a number that differs in various states and is 100 as per the principal Act. Chapter VB of the ID Act, which necessitates government approval to close down a unit employing 100 workers, has been extended to establishments employing only 300 workers. These changes could have been implemented through amendments as well.

Hi, As per Sec. 2(s) of the Payment of Gratuity Act, 1972, the term "wages" is defined as all emoluments earned by an employee while on duty or on leave in accordance with the terms and conditions of their employment, which are paid or payable to them in cash. This definition includes dearness allowance but excludes any bonus, commission, house rent allowance, overtime wages, and any other allowance.

Therefore, based on this definition, it is evident that wages do not encompass HRA or any other allowances paid to an employee. Consequently, it can be inferred that only Basic and Dearness Allowance will constitute wages as per the Act, and gratuity should be calculated solely based on these components. This practice appears to be consistent across all companies to the best of my knowledge.

However, the term "wages" is defined differently under the Labor Codes, which will come into effect once implemented by the respective states.

Regards,

I differ from the interpretation of Mr. Ranghanatha on one point. The definition of wages excludes 'other allowance'. But what is 'other allowance'? There are allowances like education allowance, overtime allowance, house rent allowance, shift allowance, meals allowance, travel allowance, etc. But there is no allowance called "other" allowance. The exclusion part of the definition of wages contains overtime, house rent, commission, bonus, and other allowance. That does not mean that you can have a component called "other allowance". What is intended is to exclude all allowances similar to commission, overtime, bonus, and house rent.

The principle of ejusdem generis can be applied here also. The allowances to be excluded should be similar to those excluded in the definition. There is a common characteristic for these allowances, and that is, these are allowances payable depending on some condition. For example, commission is based on some results, overtime is based on overstaying work, bonus is based on profits, or HRA is based on certain factors like the employee staying in leased accommodation and his spouse not receiving HRA.

Out of these allowances, the HRA is generally paid to all workers in a private company. Obviously, a proportionate deduction is made from HRA if the employee remains absent for a day. Moreover, the HRA will be paid to all employees whether they reside in their own house or not. That establishes that HRA is not a compensatory allowance that could be excluded from the scope of wages.

If you have an education allowance as a fixed component of salary and it is paid to all employees irrespective of whether any child is receiving education or not, it is not actually an allowance but is part of wages which should also qualify for gratuity. This is my observation.