 "What is gratuity? Calculation, eligibility, and all you need to know")
Gratuity is a token of appreciation, a way of showing gratitude for an employee's long-term commitment. In India, it is governed by the Payment of Gratuity Act of 1972. This legislation specifies when an employee is entitled to gratuity, how it is calculated, and the responsibility of employers to ensure timely disbursement.
What is gratuity?
Gratuity is a financial acknowledgment provided by an employer for the employee's service to the company, reserved for those who have completed a minimum of five years with the company. The Payment of Gratuity Act of 1972, which establishes the framework for gratuity, applies to various sectors, including government departments, defence, local governing entities, and certain private organisations, provided they meet predefined conditions.
Criteria for gratuity eligibility
Employment criteria for gratuity:
An employee must have completed five continuous years of service to be eligible, with certain exceptions for periods of absence due to strikes, lockouts, accidents, leaves, layoffs, unauthorised absence, or termination initiated by the employer.
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Gratuity is payable not only at retirement but also in various other situations such as:
- Superannuation
- Resignation
- Death or disablement
- Retrenchment
- Voluntary retirement
- Termination (without the employee's fault)
Organisational criteria
Organisations employing 10 or more individuals over the past year are required to provide gratuity. For non-mining roles, a year constitutes 240 working days; in mining sectors, it's 190 days. In some private sector firms, gratuity is paid after 10 years of service.
Exceptions to the Five-Year Rule
Two exceptions allow for gratuity eligibility before the five-year mark:
— Termination due to death or disablement: Employees are eligible regardless of service length under these circumstances.
— The 4 Years 240 Days Rule: Employees can qualify with just four years and seven months of service under certain conditions.
How to Calculate Gratuity?
The gratuity amount depends on the employee's last salary and their tenure. The calculation differs based on the organisation's coverage under the Payment of Gratuity Act, 1972.
According to Paisa Bazaar, the gratuity calculation formula for employees under the Gratuity Act is as follows:
Gratuity Formula = (15 × Last Drawn Salary × Number of Working Years) / 26
— Last Drawn Salary includes Basic Salary plus Dearness Allowance (DA).
— One Working Year is recognised upon completion of six months or more in a year.
For instance:
Working Period of Ms X = 11 years and 8 months
Number of working years = 12 years
Last drawn salary = Rs 75,000
Total Gratuity = Rs 519,230
The gratuity calculation formula is slightly different for employees not covered by the Act:
Gratuity Formula = (15 × Last Drawn Salary in Last 10 Months × Number of Working Years) × 30
— Last Drawn Salary includes Basic Salary, DA, and commissions.
— One Working Year is counted upon the completion of each full year.
Example: For Mr Y, with a tenure of 14 years and 7 months (counted as 14 years) and a consistent salary of Rs 75,000 in the last 10 months, the gratuity would be Rs 525,000.
Key factors
1. Gratuity limit
The maximum gratuity cannot exceed Rs 20 lakh. Any amount above this is considered ex-gratia, which is voluntary and not legally enforced.
2. Rounding off tenure
Service beyond six months is rounded up to the next full year for gratuity calculation.
3. In the event of an employee's death
The gratuity is paid to the nominee or heir as per gratuity regulations.
4. Employer's right to forfeit gratuity
Gratuity can be denied in cases of termination for misconduct.
5. Gratuity during bankruptcy
Organisations are still obliged to meet their gratuity commitments despite bankruptcy.
6. Delayed gratuity payment
If not paid within 30 days from the termination of employment, the employer must pay interest, as specified by the Central Government for long-term deposits.