Salary Definition for Calculation of Gratuity,HRA, EPF & Leave Encashment

It is important for every employee to know about a few financial terms like HRA, EPF, Gratuity etc. Since these are essential components of salary understanding these terms will help you to have a better understanding of your salary structure.

Not everyone is well versed in financial terms. while it might not be necessary to know every financial term under the sun, it is very important to know a few definitions. Your salary consists of many components such as Basic, HRA, EPF, concessional house and much more. It is very important to know and understand these components so that you get a better understanding of the structure of your salary. Given below are some of the important definitions of the components of your salary.

Calculation of gratuity covered under the payment of gratuity act

For the calculation of gratuity, salary includes only Basic salary and Dearness Allowance (DA). There won’t be any other components that will be considered for the calculation of gratuity here.

Calculation of gratuity not covered under the payment of gratuity act

Gratuity can also be calculated for those not covered under the payment of gratuity act. For the calculation of gratuity here, salary includes Basic salary, Dearness Allowance (DA) and Commission (if paid as a percentage of turnover).

House rent allowance (HRA)

House Rent Allowance is paid by the employer to the employee as part of their salary. To calculate House Rent Allowance (HRA) one has to consider Basic Salary, Dearness Allowance(DA) and Commission that is if paid as percentage 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 percentage of turnover.

Employee Provident Fund (EPF)

To calculate the salary components under employer’s contribution towards the provident fund, one has to consider the same salary components of HRA i.e; Basic Salary, Dearness Allowance(DA) and Commission (if paid as percentage of turnover).

Leave encashment

In this case also you need to consider the same salary components as you considered for HRA and EPF.

Rent-free/concessional house perquisite valuation

Salary components such as Basic salary, Dearness Allowance, Bonus, Commission, fees, all taxable allowances(excluding amount that is not taxable) and all sorts of monetary payment which is chargeable by tax are considered while calculating the valuation of perquisite.

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