While calculating gratuity, does the company consider just the basic salary or does it include allowances and bonuses? Why do the answers vary so much?
Gratuity is calculated on [Basic Salary + Dearness Allowance ] component of Last drawn salary.
I’m a bit confused about how gratuity is actually calculated. Some colleagues say it’s based only on the basic salary, while others say the total salary is considered. Can you clarify whether gratuity is calculated on basic salary or on the total salary that an employee earns?
This is a very common confusion among employees.
Gratuity is not calculated on the total salary that you take home every month. According to the Payment of Gratuity Act, 1972, gratuity is calculated only on your last drawn basic salary plus dearness allowance (DA), if applicable.
Other components of your salary such as HRA, conveyance, special allowance, performance bonus, or any reimbursements are not included in the gratuity calculation.
In short, gratuity is always linked to your basic pay (and DA, if you receive it), not your total or gross salary.
For official reference, you can check the Ministry of Labour & Employment (Government of India):