Gratuity, bonus and leave encashment: the payouts finance forgets
Monthly payroll is visible and budgeted. Gratuity, statutory bonus and leave encashment accrue quietly against employees who are still working, and are typically noticed when somebody resigns or when the auditor asks for a provision.
2 min readOadbox
Gratuity accrues from day one and is payable much later
Eligibility generally requires a minimum period of continuous service, and the payout is calculated on a defined formula against last drawn wages, subject to a statutory ceiling.
The liability, however, builds from the first day of employment. Businesses that recognise it only when it becomes payable are understating their cost of employment throughout, and the correction lands on a single year.
Statutory bonus is not a discretionary bonus
The statutory payment under the bonus legislation has its own eligibility ceiling, its own calculation base, a minimum and a maximum percentage, and a deadline for payment after the year closes.
It is separate from performance bonus and cannot be substituted by it. Employers who pay a generous discretionary bonus and assume the obligation is met are usually mistaken.
Leave encashment depends on your own policy
Unlike the other two, the shape of this liability comes from your leave policy — how much accrues, how much carries forward, what lapses, and what is paid out on exit.
- A capped carry-forward turns an unbounded liability into a known one.
- Encashment during service versus only at exit changes cash flow materially.
- Lapse rules must be applied consistently or they will not survive a dispute.
- Balances must be reconstructable from transactions, not maintained as a figure.
Provide monthly, settle promptly
All three should be provided for monthly, so the true cost of employment is visible in management accounts rather than appearing as a year-end adjustment.
And when an employee leaves, settle within the statutory window. Delayed settlement carries interest, generates disputes, and is the single most common subject of employer complaints in public forums.
Eligibility periods, ceilings and calculation bases are set by statute and revised occasionally. Confirm current provisions before computing a settlement.
Written by the Oadbox team. Something here not match how it works in your business? We would genuinely like to hear it — connect@oadbox.com.