Clarification Required on the Correct Method for Gratuity Calculation as per the Gratuity Payments Act, 1972

In my company, our labor law consultant has suggested to the Managing Director that gratuity should not be calculated according to the Gratuity Payments Act, 1972. This Act typically calculates gratuity as: gross salary x 15 x total years completed (where 5.5 years equates to 5 years and 5.6 years equates to 6 years) divided by 26. However, he has proposed that this Act does not specify that we must strictly adhere to the aforementioned formula. Instead, he recommends calculating based on the actual years and months an employee has completed. For example, if an employee completes 5.3 years, they will be paid for 5.3 months and not 5 years. Similarly, in the case of 5.6 years, the company will pay for 5.6 years and not 6 years. I would appreciate your guidance and any references to the ruling of the Gratuity Payments Act. Thank you in advance.

The gratuity calculation as per the Payment of Gratuity Act, 1972 is indeed calculated as per completed years of service. However, the Act also states that if an employee has completed more than six months in a year, it should be considered as a full year. Hence, 5.6 years of service would be considered as 6 years. But if an employee has completed 5.3 years of service, it should be considered as 5 years, not 5.3 months.

So, in your scenario, if an employee completes 5.3 years, gratuity should be calculated for 5 years, and for 5.6 years, it should be calculated for 6 years. The formula for gratuity calculation is: (Last drawn salary x 15 x Number of years of service) / 26.

The suggestion given by your labour law consultant to calculate gratuity based on actual years and months is not in line with the Payment of Gratuity Act, 1972. It's always recommended to follow the law to avoid any legal complications.

For your reference, you can check the Payment of Gratuity Act, 1972 on the official website of the Ministry of Labour and Employment. https://labour.gov.in/acts/payment-gratuity-act-1972

In our opinion also after getting eligibility, if an employee has completed more than six months in a year, it should be considered as a full year. Hence, 5.6 years cannot be considered as six years for making gratuity payment as it should be more than six months. For consideration for calculation we are to consider wages as defined at section 2(s) of this Act. Wages means Basic & DA only. Calculation is to be made as formula as laid down in the Act.

R N KHOLA