Gratuity Calculation Confusion: Should It Be Based on Gross or Basic Salary?

Dear all,

I request you to please keep me posted regarding the calculation of gratuity. Should we calculate the gratuity on gross salary or on basic salary? I would await your reply.

Regards,
Shweta Mehta

Hi,

Count gratuity based on the basic salary, not on the gross. Here is the formula I am sharing with you. You can calculate gratuity using the following formula:

Basic * 15 / 26 * years = Gratuity (not exceeding 3.5 lacs)

Where:
- Basic = Last Drawn Basic
- 15 = Number of days
- 26 = 26 working days in a month
- Years = Years of service, which should be more than 5 years of continuous employment

I hope this helps! Let me know if you need any further assistance.

Please remember that gratuity is calculated on the gross salary comprising Basic Salary and Dearness Allowance, which may be fixed or variable. If a company does not give DA, then gratuity can be calculated on the Basic Salary alone (the salary on which the EPF is deducted and contributed).

Regards,
Madhu.T.K

Hi,

Employees who have completed 4 years and 240 days are also eligible for Gratuity.

Regards,
Surender

Dear Sunder,

The matter of 4 years + 240 days is disputed. In P. Raghavalu and Sons Vs Additional Labour Court, Andhra Pradesh, it was decided that an employee who has worked for 4 years 11 months and 10 days was not eligible for gratuity. The thing is that in order to be eligible for gratuity, one should have completed 5 years of service counted from the date of joining. 240 days are taken for determining his continuous service wherein one who had worked for 240 days (above the ground) and 190 days (below the ground) will get gratuity for that year. There is yet another ruling that one who is eligible for gratuity by reason of his more than 5 years of service but who had in between a particular year during which he had not worked for 240 days shall be given gratuity for that year provided he had worked actually for at least 190 days.

I also understand that there was a verdict in support of your view in Delhi, I think. But the details are not available as to whether any superseding verdict by a higher court is in force.

Regards,
Madhu.T.K

Can you guide me on how gratuity is calculated percentage-wise when calculating the CTC of the employee? In my previous company, it used to be calculated at 4.16%, whereas in the company where I am currently employed, gratuity is calculated at the rate of 4.83%. Why is there a difference?

Dear Brijesh,

I believe that gratuity cannot form part of the salary. It becomes due only when the employee leaves after 5 years of continuous service or dies while in service. In both cases, the payment to be made by the employer is 15 days' salary for every completed year of service. While calculating the years of service (beyond 5 years), a fraction of service of six months and more should be considered as one year. Therefore, an employee leaving service after 8 years and 7 months from his date of joining will get gratuity for 9 years. Suppose his salary (Basic + DA) at the time of leaving is Rs 12000, then the amount payable to him will be: Rs. 12000 X 15 days X 9 years / 26 days or Rs 62,307.69.

The amount of gratuity never accrues. Therefore, you cannot make an assumption as to what this will cost the company (CTC) by way of gratuity. I personally feel that the concept of showing gratuity as part of the salary, of course CTC, is basically wrong. For details, please visit my blog entry titled "CTC Vs BTC".

Regards,
Madhu.T.K

Hi,

Gratuity is calculated on basic pay plus dearness allowance. If there is no element of dearness allowance in the salary, as is the case for some private sector employees, then the salary constitutes the basic pay only.

As far as gratuity being a part of CTC, this practice is being followed in private/multinational organizations, where they add everything they are to pay to maintain the employee as part of CTC. Nowadays, firms take out a Group Gratuity Insurance Policy, and the premium paid constitutes a part of CTC. Even in PSUs, when calculating the financial effect during pay revisions, an exercise is undertaken to find out what it costs the company.

If I am wrong, anyone is welcome to correct me.

Regards,
Karath AK
Manager (HR)

Dear Friends,

I agree with Mr. Madhu's remarks. Gratuity is not a part of salary and, of course, nowadays, in order to show a high pay package, many employers are including anything and everything like gratuity, performance bonus, etc. They will show it only in the appointment order, but actually, if the concerned employee leaves the organization, he is not eligible for the gratuity even though it is mentioned in the appointment order as an annual salary.

In many companies, performance bonuses have no policy or formula, but they are still added in the CTC. I have one question here: if the employee leaves the organization before completing 5 years and, as per his appointment letter, gratuity is mentioned annually as a part of the salary, is the company liable to pay gratuity in this case? Please clarify.

Thanks & Regards,
Krishna Prasad
Manager - HR & Admin.

If gratuity is taken as part of the salary and every month an element of gratuity is deducted from the gross salary, then the employer will be liable to pay the amount so deducted as gratuity to the employee when he leaves the organization even before completing the required period of five years. Certainly, there is no such verdict made by any court so far. But on the merits of the case, it appears to be a deduction not authorized by the Payment of Wages Act.

Regards,
Madhu.T.K