Gratuity and provisions for bonus and leave
Each month the system works out the gratuity every employee has earned so far and books the part not yet provided in your accounts. One Provisions report shows what you owe your people on any date: gratuity, statutory bonus and leave at the encashment rate.
PLANSFrom Growth
The problem it solves
- A senior person resigns after twelve years and the gratuity hits one month's accounts as a surprise.
- The auditor asks for the gratuity, bonus and leave liability at year end and HR builds it in a spreadsheet over a week.
- Nobody knows what the encashable leave on the books is worth until people start leaving.
How it works
- Set the gratuity rule on the Entity's Payroll tab (15 days per year, 26 days in a month, at most 20,00,000 to start with). Mark the salary components that are gratuity wages, usually Basic and DA.
- Give the Entity a Gratuity Provision account and a Gratuity Expense account. From then on a draft provision for last month is made by itself early each month.
- Open Payroll > Salaries > Gratuity Provision and press Calculate. Each employee with a salary on the date shows service in years, gratuity wages and gratuity as on the date. It also shows what is already provided and the provision to add.
- Press Post. The total is booked as Gratuity Expense against Gratuity Provision, and the form keeps the journal entry.
- When a person leaves and is paid gratuity in the full and final, what was provided for them is used up.
- Any time, open Payroll > Reporting > Cost and Budget > Provisions and pick the Entity and As On. See gratuity, bonus accrued and leave liability per employee and per department.
Everything it does
How gratuity is worked out
- Full-month gratuity wages x Gratuity Days per Year / Gratuity: Days in a Month x years of service, capped at the Gratuity Maximum
- Defaults: 15 days per year, 26 days in a month, maximum 20,00,000, all settings on the Entity
- The provision counts service from joining, to two decimals of a year. The 5-year minimum is not applied, because the liability builds from the first day
- On exit the full and final applies the minimum (Gratuity After: 5 years, not needed on death). It counts a part year above 6 months as a full year
- Indian gratuity only: an Entity on pay preparation for another country has no gratuity
The monthly provision
- A draft for the last month is made each month for every Entity that has a Gratuity Provision account. You can also make one for any date
- Statuses Draft, Posted, Cancelled; Calculate works only on a draft
- Provisions are posted in date order: one cannot be posted when a later one is already posted
- Cancel on a posted provision reverses its journal entry; Back to Draft opens a cancelled one again
- Without payroll accounting set up, Post keeps the figures but books nothing
The Provisions report
- Per employee: service, gratuity wages, gratuity, gratuity already provided, gratuity to provide, bonus accrued, leave days, leave liability and the total
- Per department: the same figures and the number of people
- Summary cards: Gratuity, Gratuity already provided, Gratuity to provide, Bonus accrued, Leave liability, All three
- Bonus accrued: the statutory bonus plan's % (8.33 % minimum to start with) of bonus wages paid since the start of the financial year. Bonus already declared is taken off. This is shown, not posted
- Leave liability: balances of leave that the policy encashes at exit or at year end, times the day rate. The day rate is Basic or gross divided by 30 to start with
- Excel and PDF; people who have left are not counted
Leave Liability report
- One line per employee and leave type: balance, day rate, liability, the highest first
- Counts up to the policy's Max Encash on Exit where one is set
- Confidential salaries are left out for users who may not see them, with a count of how many
Who uses it
Payroll officerCalculates and posts the monthly gratuity provision and runs the Provisions report.
AccountsSees the provision as a journal entry in the Entity's books and checks it at year end.
HR administratorSets the gratuity rule, the gratuity wage components and the two accounts.
Owner or finance headReads what the business owes its people on a date, by department.
Where you use it
- Web: Payroll > Salaries > Gratuity Provision; Payroll > Reporting > Cost and Budget > Provisions and Leave Liability
- The SmartMy HRMS app: the Provisions report for users with a payroll role (built and in testing, not in the app stores yet)
- Not built: actuarial valuation for the accounting standard, a gratuity trust or insurer fund statement, and gratuity forms. The provision is a straight calculation from wages and service
What you control
Settings
- Gratuity After (years): 5; Part Year Counted as a Year Above (months): 6 (used in the full and final)
- Gratuity Days per Year: 15; Gratuity: Days in a Month: 26; Gratuity Maximum: 20,00,000
- Gratuity Wages: a tick on each salary component (Basic and DA in the ready template)
- Gratuity Provision and Gratuity Expense accounts on the Entity's Payroll Accounting tab
- Leave Encashment: Days in a Month: 30; statutory bonus plan Minimum %: 8.33
Questions
Why does the provision include people with less than five years of service?
Because the liability builds from the first day. The 5-year minimum decides only whether gratuity is paid on exit, and the full and final applies it then.Is this an actuarial valuation?
No. It is what each employee would get if they left on the date, from their wages and service. If your auditor needs an actuarial valuation, it still comes from an actuary.Does it post the bonus and leave provisions too?
No. Only gratuity is posted to the accounts. Bonus accrued and leave liability are shown in the Provisions report for you to book.Can we change the 15/26 formula or the ceiling?
Yes. Gratuity Days per Year, Days in a Month and the Gratuity Maximum are settings on each Entity. Change them when the law or your own policy changes.What happens to the provision when someone leaves?
When the full and final with gratuity is paid, what was provided for that person is used up. It no longer counts as provided in later months.Related features
EXITFull and final settlementOne settlement brings together what you owe the leaver and what they owe you. It covers held salary, leave encashment, notice pay or recovery, gratuity, loans, clearance dues and the final TDS. HR approves, then accounts, then payroll marks it paid.LOANS, INCREMENTS, BONUSIncrements, revision planner and bonusTry salary revision scenarios against your budget. Run the yearly increment cycle with proposals, approval by HR then top management, letters and arrears. Pay the statutory bonus and your own bonuses through payroll.LEAVELeave types, credits, rules, year end and maternitySet up any leave type with its own credits and rules, and let the system keep every balance. Requests are checked against the policy when they are sent, approved through your chain, and closed at year end by carry forward, encashment or lapse.PAYROLLPayslips, bank files and accounting entriesOnce a payroll run is approved, each employee gets a password-protected PDF payslip by email. The bank gets a transfer file in its own format with a covering letter. The salary posts to each Entity's accounts.VIEWS AND REPORTSHR reports and the custom report builderHeadcount, attrition, salary cost, leave liability and more than 20 payroll and statutory reports, most of them on screen, in Excel and as PDF. In Scale, HR builds its own reports without code and shares them; each person sees only what their access allows.
See your own month run in it.
Tell us how many people you have, how you take attendance and how your salary is structured. We will show you SmartMy HRMS set up that way.