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.
From India, Mumbai
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5From India, Mumbai
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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
From India, Gurugram
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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
From India, Gurugram
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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
From India, Delhi
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R N KHOLA
From India, Delhi
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The calculation of gratuity strictly on the basis of months of service rendered is wrong but you have to take the years of service only. If there is fraction of a year of more than six months, the service shall be rounded to the next whole figure whereas if the fraction account for less than six months it shall be ignored. Accordingly, if the service is just 5 years and six months, the gratuity should be calculated considering the length of service to be five years only whereas if the service accounts for 5 years, six months and one day, he should be paid gratuity for six years.
While calculating gratuity, you should take the whole salary which are as per contract of employment. The Act has not mandated that it should be calculated only on Basic pay and dearness allowance because the wages as given in the Payment of Gratuity Act mean "all emoluments" other than commission, overtime allowance, bonus, house rent allowance and similar other allowance. These exclusions are such components which are payable based on some conditions, like, commission is payable based on some sales or other targets, overtime wages is payable based on additional work, bonus is payable based on profits of the company, HRA is payable based on one condition that the employee is residing in leased accommodation and his/ her spouse is not in receipt of it. And if there is any allowance similar to these, like education allowance which is payable to an employee whose son or daughter is undergoing an academic course, hill allowance which is payable to an employee who is posted in hill area, night allowance which is payable to one attending night shifts etc. That means, you can not just ignore the allowances from calculation sheet of gratuity but you have to establish whether these allowances are compensatory allowances or allowances payable on certain conditions. Obviously, the amounts of these allowances will not be available in the contract of employment or salary structure. For example, you can not find a figure representing overtime allowance, bonus or commission in the salary break up given to you at the time of appointment.
From India, Kannur
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While calculating gratuity, you should take the whole salary which are as per contract of employment. The Act has not mandated that it should be calculated only on Basic pay and dearness allowance because the wages as given in the Payment of Gratuity Act mean "all emoluments" other than commission, overtime allowance, bonus, house rent allowance and similar other allowance. These exclusions are such components which are payable based on some conditions, like, commission is payable based on some sales or other targets, overtime wages is payable based on additional work, bonus is payable based on profits of the company, HRA is payable based on one condition that the employee is residing in leased accommodation and his/ her spouse is not in receipt of it. And if there is any allowance similar to these, like education allowance which is payable to an employee whose son or daughter is undergoing an academic course, hill allowance which is payable to an employee who is posted in hill area, night allowance which is payable to one attending night shifts etc. That means, you can not just ignore the allowances from calculation sheet of gratuity but you have to establish whether these allowances are compensatory allowances or allowances payable on certain conditions. Obviously, the amounts of these allowances will not be available in the contract of employment or salary structure. For example, you can not find a figure representing overtime allowance, bonus or commission in the salary break up given to you at the time of appointment.
From India, Kannur
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(Fact Checked)-Your explanation of the Gratuity Payments Act, 1972 is accurate. It's important to consider the full years of service and round up if over six months. Well done! (1 Acknowledge point)
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Payment of Gratuity Act, 1972 & The Rules.ppt
THE PAYMENT OF GRATUITY ACT 1972.doc
Farhan Shamsi
Thank u sirCiteHR.AI
(Fact Checked)-Your understanding is correct. If an employee has completed 6 months or more in a year, it is considered as a full year for gratuity calculation. Keep up the good work! (1 Acknowledge point)