Salary definition for calculations of Gratuity,HRA, EPF and Leave Encashment

Salary consists of so many components like Basic, DA, HRA, Bonus, Commission, Allowances and Perquisites. But while calculating Gratuity, HRA,  EPF and value of perquisites for rent free/concessional house we need to consider  only few components of salary. So let us look into detail about those considerations.

1) Salary definition for Gratuity-

A) Gratuity covered under Payment of Gratuity Act 1972-For this purpose salary means only Basic salary and Dearness Allowance (DA). No other salary components will not be considered for calculaiton.

B) Gratuity not covered under Payment of Gratuity Act 1972-For this purpose salary means  Basic salary, Dearness Allowance (DA) and Commission (if paid as a % of turnover).

Remember while considering salary in the case of  (B) Gratuity not covered under Payment of Gratuity Act 1972 DA need to be considered only if it is forming part of retirement benefit otherwise not to consider. Also Commission should be in the form of % of turnover not lump sum payment.

2) Salary definition for House Rent Allowance (HRA)-For calculation of House Rent Allowance (HRA) you need to consider Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover).

Again in this case too DA need to be considered if it is forming part of retirement benefit otherwise not to consider and Commission also need to % of turnover.

3) Salary definition for Employee Provident Fund (EPF)- For calculation of salary components under employer’s contribution towards recognized provident fund too we need to consider the same salary components of HRA i,e Basic Salary, Dearness Allowance(DA) and Commission (if paid as % of turnover). Also the above said conditions of considering DA and Commission too will apply here also.

Click here to see updated meaning of salary for calculation of EPF contribution.

4) Salary definition for Leave Encashment-In this case also you need to consider the same salary components as you considered for HRA and EPF.

5) Salary definition for rent-free/concessional house perquisite valuation-Below salary components are considered while calculating the valuation of perquisite.

a) Basic Salary;

b) Dearness Allowance (if terms of employment so provides);

c) Bonus;

d) Commission;

e) fees;

f) All taxable allowances (excluding amount not taxable); and

g) any monetary payment which is chargeabble to tax (by whatever name called).

But it does not include-DA if not considered for retirement benefits, employer’s contribution to provident fund account of an employee, all allowances which are exempt from tax, any lumpsum amount received like Gratuity, Leave Encashment, VRS or Commutation of Pension and value of perquisites (under section 17 (2)).

Hope I simplified the Salary definition for the calculation of above facilities. 

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Comments

  1. MANJUNATHASWAMY says

    If the official is in rent free quarters he is not getting HRA. However in leave encashment he is elegible or HRA or not? pl clarify me

  2. Shridhar B Panchal says

    Hi Basu Nivesh.

    I am an employee of BPO. I am leaving my current company as I have now completed 7years and 7 months. So now I want to know that how my gratuity amount be calculated? For example: My last drawn salary is Rs. 10800/- due to health issues other it get fluctuates and I don’t what is considered out of this in Dearness allowance. Break up is BP – 4000, HRA – 2000, Medical Reimbursements – 1250 and Special allowance – 11194/-. After all this my guaranteed pay is 18444/-. Apart from this I have Performance Linked Incentive/Bonus – 1844, PF -Employer contribution – 480, Gratuity – 192, Insurance premium – 620, Retirals & Benefits – 1292. After which the Target Total Compensation – 21580/-

    So now please let me know what will be gratuity amount that I would be getting from my company. Please reply ASAP.

    Thanks and Regards,
    Shridhar B Panchal.

  3. Rajesh kumar Sharma. says

    Sir,

    Adoc allowance is a part of my salary slip break up, Kindly tell me Adoc allowance will be either include or not for calcution of Gratuity/leaveincashment/PF/HRA.

  4. manash says

    sir
    salary for the purpose of HRA as given above is wrong
    it does not include DA and comission at all

  5. Rajshekar says

    Sir,

    1. I am working in a Mining Industry for the past 10 years these days what i thought for calculation of Gratuity is Last Salary Drawn X 15 X No of years of Service / 26 is this correct or wrong

    2. Now i want to know is there any new law for payment of Gratuity for which only Basic & Other allowances are to be considered

    3. in our company our payment terms are like this Basic & other Allowance (DA, HRA, Washing Allowance etc.,) but now a days we came to know that apart from above mentioned column there is another column which doesn’t cover under the payment of Gratuity. is there any such kind of column

    4.during the increment of April 2014 we came to know about that as there is new column is arrived and the total increment is mentioned that column, by some other sources we came to know that only March 2014 Salary is considered for payment of gratuity and the rest the value which is mentioned in the Third column is not considered for payment of Gratuity

    Kindly Clarify the above mentioned points at the earliest. the matter is urgent

    • says

      Rajshekhar-1) It is on last drawn salary. 2) No the definition is same as above. 3) No such column for gratuity calculation apart from the said formula. 4) I am not aware of what you are mentioning as “Column”.

  6. ASD says

    Sir if
    Total Salary is Rs. 100 per month(Basic: Rs. 50/,HRA: Rs. 25, other allowances: Rs. 25)
    If an employee is having 7 days accumulated leave
    Kindly let us know how much amount Company has to pay?

  7. Rohit Karnani says

    Does salary for RFA includes salary from more than one source?
    I mean to say if Mr. X Employed with A ltd. & B Ltd. and A Ltd. provide him RFA then at the time of calculation of salary for RFA , does it include the salary of A Ltd. and B Ltd.? If yes, then what are the items of B ltd. we should include in calculating salary for RFA. Please Clarify

    • Basavaraj Tonagatti says

      Rohit-Can you clarify how Mr.X can be employed by two employers? Is you are saying about part time jobs or fultime? I am bit confused with your question. Can you elaborate more specifically about your doubt please.

      • Rohit Karnani says

        sir, I am talking about part time.
        Sir I have situation 2 also- in P.Y 12-13 Mr. X Retired from from A Ltd. and on the same P.Y he joined B Ltd, and B Ltd provides him RFA then in this situation should we take the salary of A Ltd.also to calculate RFA?

  8. K.K. SARAWAGI says

    Dear Mr. Basu,

    If house property is in the name of one brother, whether it can be shared with other 2 younger brothers after entering into a deed of family arrangement and whether it can be got registered. If answer to this is in negative, please inform whether the best possible course is to make a gift of 50% shares to younger brothers (@25% to both). In such case whether gift deed is to be got registered and also the 50% share in the property will have to be registered by them. What will be the total rate of stamp duty or tax applicable in that case.
    KK Sarawagi

    • Basavaraj Tonagatti says

      K.K.Sarawagi-Your query seems to be more legal than personal finance. Hence I request you to consult a lawyer on this issue.

      • K.K. SARAWAGI says

        In ‘taxguru’ site yesterday there was an article by Mr. R. Kumar on family agreements with regard to sharing of property. As I received one query in this respect from my colleague, I forwarded the same to him as well as to you.
        O.K., in any case, he will seek legal assistance in the matter. At the outset, I have said that deed of gift will be the best option.

        • Basavaraj Tonagatti says

          K.K.Sarawagi-I know that gift deed is best option. But I plainly not give you advice and I am not the legal expert. Hence advised you to consult a lawyer.

  9. Rebi says

    The employee is eligible for 60 days leave & he is taking 15 days leave only & he has given a leave settlement of two months BP+HRA+DA.After 15 days when he joins is it necessary to give him HRA+ DA for the leave settled months again on salary time with BP.(Or in encashment of leave salary is it necessary to give HRA & DA)

  10. K.K. SARAWAGI says

    Director is employee of company and I feel commission received as fixed percentage of net profit is salary, however, it should not be considered for the purpose of calculating exemption of HRA u/s 10(13A) read with Rule 2A since it is in the nature of contingent receipt which matures only after the end of the financial year. Hence, Salary for this purpose has to be read within the meaning of Rule 2(h) of Schedule IV of the I.T.Act. Please inform if I am correct otherwise I request you to please provide some judicial ruling in this respect.

    • Basavaraj Tonagatti says

      K.K.Sarawagi-I agree with your points. It specifically mentions that 1) component from employer should be in the form of HRA but not as % of commission 2) You need to be rented. So both the conditions will not get satisfied. Hence we can’t consider this as HRA.

  11. K.K. SARAWAGI says

    CORRECTION OF MISTAKE IN ABOVE COMMENT:
    Please read “accommodation owned by the company” instead of “accommodation owned by the director”.

  12. K.K. SARAWAGI says

    Whether commission payable to Director of company as fixed percentage of net profit shall form part of salary for calculation of perquisite for providing rent-free accommodation owned by the Director. Similarly, whether salary for the purpose of calculating exemption of HRA u/s 10(13A) would also include above-stated commission.

    • Basavaraj Tonagatti says

      K.K.Sarawagi-If director is employee of company then commission payable to director is considered as salary otherwise this commission will be treated under the head either of Income from Business or Income from other source depending on the facts.Now rent-free accomodation benefit will be treated again as a perquisite if director is employee of company and same case applies to HRA also.

  13. vikram says

    if employee retired on Feb.13 and leave encashment paid in April 2013 then taxable encashment calculate as per slab of 2012-13 or 2013-14 ?

    • K.K. SARAWAGI says

      Basis of charge in respect of salary income is fixed by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier.

  14. S David Perinba Dhas says

    Its interesting to note that in the Salary definition for rent-free/concessional house perquisite valuation, the author has mentioned that Leave Encashment should not be considered. But, Leave Encashment is of two tyoes – 1. Leave Encashment during the service period which is fully taxable and 2. Terminal Leave Benefit at the time of separation from active service. I want to know which Leave Encashment does the author refer to.

    • BasuNivesh says

      Krish-DA stands for “Dearness Allowance”, this is the allowance your employer will pay considering the cost of survival. HRA is limited to your house rent. So both are different.

  15. CS Ankush Lawate says

    whether DA is to be considered or not for HRA purpose if it is clearly not mentioned that it forms part for retirement benefit…???

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