Gratuity Calculation Formula: Amidst discussions about the implementation of the new labor code, the biggest question is how it will affect your finances and retirement fund. For salaried employees, gratuity is a crucial savings component, received in exchange for long-term service. However, the new rules may bring significant changes to its calculation. If you want to understand whether you will benefit from the new system, this news is very important for you.
Will Gratuity be paid even after 1 year of service?
The new labor code has relaxed some rules depending on the category of employees. The biggest relief is for 'fixed-term' or contract employees. Until now, the rule was that continuous service of 5 years in the same company was necessary to receive gratuity.
However, according to the new proposals, this limit has been reduced to just 1 year for fixed-term employees (contractual employees). This means that if someone works on a contract for 1 year, they will also be entitled to gratuity. The 5-year service condition will remain the same for regular or permanent employees. According to Kriti Kaushik, Partner at Shardul Amarchand Mangaldas & Co., the 5-year rule will continue for regular employees, but fixed-term employees will receive payment on a pro-rata basis.
The most important part of the new labor code is the new definition of 'wages'. The new rules state that your 'basic salary' should be at least 50% of the total CTC (Cost to Company). If your allowances are more than 50% of the total salary, the excess amount will be added to 'wages'.
This will directly impact the gratuity calculation. Until now, gratuity was calculated only on basic salary and dearness allowance (DA). But with the expanded scope of 'wages' under the new rules, the gratuity amount will automatically increase.
How is the gratuity amount determined? The government has set a standard formula for gratuity calculation, which is very easy to understand. People often make the mistake of calculating it based on their in-hand salary or CTC, whereas gratuity is always calculated on their basic salary and dearness allowance (DA). Formula: (Last Basic Salary + DA) × (15/26) × (Total years of service). Two numbers are very important in this formula: 15 and 26.
15 - Because you are given 15 days' salary as a reward for each year of service.
26 - A month has an average of 30 days, but 4 Sundays are deducted. Therefore, the working days are considered to be 26.
How much gratuity will you get if your salary is ₹30,000?
Let's say an employee's total monthly salary (Gross Salary) is ₹70,000, and they have worked for the company for 10 years. Their basic salary is ₹30,000, and other allowances are ₹40,000. Since the other allowances (₹40,000) are ₹5,000 more than 50% of the total salary (₹70,000), which is ₹35,000, this ₹5,000 will be added to the basic salary.
New salary for gratuity calculation = 30,000 + 5,000 = ₹35,000
Gratuity Formula: 15/26 × (35,000 × 10)
Total Gratuity = ₹2,01,923 (approximately)
According to the current rules (Payment of Gratuity Act), the calculation is currently done only on the basic salary (₹30,000). The excess allowances do not have any effect. Salary for calculation = ₹30,000
Gratuity formula: 15/26 × (30,000 × 10)
Total gratuity = ₹1,73,076 (approximately)
It is clear that with the implementation of the new rules, the employee will get a direct benefit of approximately ₹28,847.
Gratuity will be paid even before 5 years
Experts say that the rule of 5 years of mandatory service applies only in normal circumstances. If an employee dies or becomes disabled, gratuity will be paid even if the 5 years of service are not completed. Also, fixed-term employees will receive a pro-rata payment based on their tenure upon the completion of their contract, even if the tenure is less than 5 years.
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