How to calculate gratuity on gross salary vs. basic

An end of service gratuity (called "Gratuity") is money paid to an employee or his family after his employment with a company has come to an end. Gratuity is not a standard employment benefit in the UK. It is however a key benefit for non-national employees working in the Gulf Cooperation Countries, including Saudi Arabia, Qatar, United Arab Emirates, Oman and Kuwait, where an employee's entitlement to Gratuity is set down by law. Typically an employee becomes eligible to receive Gratuity after a certain number of years in service. The amount is calculated by reference to the salary of the employee.

Know the law pertaining to Gratuity in the country where your business operates. For example, in the UAE both Federal Law No 8 of 1980 on the Regulation of Labour Relations (as amended) (UAE Labour Law) and DIFC Law No 4 of 2005 (as amended by DIFC Law No. 3 of 2012) (DIFC Employment Law) set out a formula for calculating Gratuity. Look out for provisions which reduce Gratuity if the employee resigns, or resigns within a certain number of years of starting employment. You will also need to read your employee's employment contract and have up to date details of his salary, benefits and length of service.

Calculate the financial value worth of all non-salary benefits and remunerations, if the law in your country pertaining to the Gratuity requires these to be taken into account. This might include living allowances, insurances, compensation for not taking sick days, commission payments and honesty rewards.

Add the total financial value of benefits to the amount of basic salary an employee receives. This is the employee's gross pay. His basic pay is his salary without the value of the benefits. Some countries (such as the GCC countries) require you to calculate Gratuity on gross pay, some (such as India) only on basic pay.

Ascertain daily gross or basic pay by dividing the employee's monthly pay by the number of working days in a month. This is the number of working days in a month set down by law, not actual days worked by the employee; for example, the Indian government designates 26 days as working days in a month, so 26 is the number you must use. Some jurisdictions, such as the UAE, require you to work with annual figures.

Multiply your daily rate by the number of days Gratuity your employee is entitled to receive. In India, this is fixed at 15 days. Check the applicable law for details of when payment must be made. Typically this will be a certain number of days (around 14) after the employment ends.

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About the Author

A former real estate lawyer, Jayne Thompson writes about law, business and corporate communications, drawing on 17 years’ experience in the legal sector. She holds a Bachelor of Laws from the University of Birmingham and a Masters in International Law from the University of East London.

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