Gratuity calculation: Left job with Rs 12,000 Dearness Allowance, Rs 20,000 Basic Pay? Check gratuity

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Updated: February 26, 2020 10:36 AM

Gratuity calculation for monthly rated, piece rated and seasonal employees under Payments of Gratuity Act 1972: Payment of Gratuity is a 'Defined benefit' provided to an employee as a lump sum, on his retirement.

gratuity calculation formulaCheck how to calculate gratuity

Gratuity calculation for monthly rated, piece rated and seasonal employees under Payments of Gratuity Act 1972: Payment of Gratuity is a ‘Defined benefit’ provided to an employee as a lump sum, on his retirement. To put it simply, gratuity is the money given to an employee in recognition of his services as a parting gift. The provisions of payment of gratuity are governed by the Payment of Gratuity Act 1972. The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh. The employer can, however, pay more gratuity than the prescribed ceiling. The payment of gratuity is made either to the employee at the time of his retirement, or termination or to the legal heir in case of death of the employee.

The Payment of Gratuity Act 1972 doesn’t apply to central or state government employees and other employees covered by any other act for Gratuity payment. The “Employee” under the Payment of Gratuity Act 1972 means any person employed on wages for doing any type of work, including those hired in the managerial or administrative capacity. The key consideration for gratuity payment is that the person should be employed on wages. Those employed as apprentices are not eligible for gratuity.

The calculation for payment of Gratuity is made for each ‘completed year of service’, or each continuous year of service. The employee is said to have completed one continuous year of service if he/she had provided an uninterrupted service in that period, including interruptions on account of sickness, accident, leave, absence from duty without leave, lay-off etc.

The period, in which there has been a ‘break in service’ as per rules and strike/lockout/cessation of work due to fault of the employee, is not included for payment of gratuity.

The one-year of continuous service is considered to have been completed if:

  • the employee has worked for 190 days ‘below the ground’ in a mine or a firm which works for less than six days in a year. Or,
  • he has worked for 240 days in other cases.

Mandatory 5 years: The gratuity is paid to an employee on the termination of his employment after he has served for five continuous years. In case of death of the employee, five continuous years of services is not mandatory.

Gratuity Calculation

The Gratuity amount is calculated differently for monthly-rated, piece-rated and seasonal employee. Here are some key points considered for gratuity calculation:

  • The wage considered for calculation is the last drawn salary.
  • Allowances other than Basic and DA are not considered for gratuity calculation.

Gratuity calculation for monthly rated employees

15 days of wages (Basic + DA) of each year of completed service is considered for calculation. The per-day wage of the employee is calculated by dividing the monthly wage by 26.

Service rendered by the employee for more than six months is considered as one year.

For calculating the per day wage of the employee, the monthly wage (last drawn Basic + Dearness Allowance) is divided by 26 and the result is multiplied by 15 x the number of years of service; i.e.

Gratuity = (Basic + DA) x 15/26 x number of years.

Example: If an employee had joined a job on 01-08-2005 and retired or got his job terminated on 30-04-2019, with last drawn basic Salary of Rs 20,000 and DA of Rs 12000, his Gratuity will be:

(Rs 20,000+Rs 12000)x 15/26 x 14 = Rs 258,461.5

Note: Here the employee has completed 14 years of service. The seven months of his first year (August 2005 to March 2006) is to be counted as one year as it is more than six months of service.

Gratuity calculation for piece rated employee:

In case of such employees, month wage to be considered for gratuity calculation is the average of the total wages he has received for a period of three months immediately preceding the job termination. The rest of the calculation is the same as the monthly rated employees.

Gratuity calculation for seasonal employees

In the case of seasonal employees, 7 days wages for each season of service completed by the employee is considered for calculation. Rest of the formula is same as monthly-rated employees.

For example: If a seasonal employee retires after working from 2005 to 2015, working one season each year, with Rs 10000 Basic and Rs 6000 DA, his gratuity will be

7/26 x (Rs 10000+6000) x 11 = Rs 47,384.6

Note: Here the employee has worked for one season every year. Hence, the total season is 11.

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