The Payment of Gratuity Act, 1972 is applicable to establishments / factories in India employing 10 or more persons. Gratuity is considered to be a form of social security. Any employee completing 5 years of continuous service is entitled to Gratuity at the rate of 15 days of wages per years of completed service.
For the sake of wages, Basic and Dearness Allowance are taken into consideration. The following formula is used to calculate the amount of Gratuity payable.
Gratuity = Basic + Dearness Allowance x 15 x No. of years of continuous service.
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For the purpose of calculating the number of years of service, it should be noted that any period more than 6 months should be considered a full year. For example, if an employee has been in service for 5 years and 6 months, it is to be considered 6 years. Conversely, if the employee has been in service for 5 years, it should be considered 5 years only.
Allowances such as Education Allowance, Traveling Allowance etc are not be considered while determining wages for the purpose of calculation of amount of Gratuity under Gratuity law in India.
If Dearness Allowance is paid under the name of ‘Special Allowance’ it has to be considered for calculating Gratuity under Gratuity Law in India.
The above note is general in nature and covers the basic aspects of the Payment of Gratuity Act in India.
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