One such benefit is gratuity — a sum of money paid by an employer to an employee in recognition of long-term service. This guide will break down what gratuity is, who is eligible, and how to calculate it effectively, helping you understand if and when you qualify for this benefit.
What is Gratuity?
Gratuity is a financial reward given by an employer to an employee for services rendered over an extended period. It’s essentially a token of appreciation and is legally mandated for certain employees under the Payment of Gratuity Act, of 1972. Gratuity not only rewards loyalty but also helps provide employees with financial security upon leaving the organization.
Key Conditions for Gratuity Eligibility
To qualify for gratuity, an employee typically must:
- Complete at least five years of continuous service with the same employer.
- Work without any break in service during this period.
However, there are exceptions to the five-year rule:
- Disability: If an employee faces a permanent disability due to an accident or disease.
- Death: In the unfortunate event of an employee’s death, gratuity is payable to the employee’s nominee.
As stated in the Payment of Gratuity Act, gratuity is a legal obligation, ensuring employees receive financial compensation for their dedication and loyalty.
How to Calculate Gratuity
Gratuity is calculated using a simple formula that considers an employee’s final drawn salary and the duration of service:
Gratuity Formula:
Gratuity Amount = 15 × Last Drawn Salary × Years of Service / 26
Here’s a breakdown:
- 15: Represents the number of days’ salary paid for each year of service.
- Last Drawn Salary: Only the basic salary is considered for calculation.
- Years of Service: This includes all completed years of service.
Example Calculation:
Consider Mr. Ajay, who has worked with Tata Motors for 15 years. His last drawn basic salary was ₹30,000.
- Multiply 15 by his basic salary (₹30,000): (15 \times 30,000 = 450,000).
- Multiply by the years of service (15 years): (450,000 \times 15 = 6,750,000).
- Divide by 26: (\frac{6,750,000}{26} = ₹2,59,615).
Thus, Mr. Ajay is eligible to receive ₹2,59,615 as gratuity.
Important Notes on Gratuity Calculation:
- Upper Limit: As per the Gratuity Act, gratuity cannot exceed ₹10 lakhs. Any additional amount is known as ex gratia and is discretionary for the employer.
- Rounding Off: If an employee’s service tenure includes more than six months, it rounds up to the next year. For example, 15 years and 7 months of service will be considered 16 years, while 15 years and 4 months will be counted as 15 years.
Frequently Asked Questions
Can an Employee with a Break in Service Receive Gratuity?
No, gratuity is only payable if the employee has completed continuous service without breaks. A continuous period of five years is a strict eligibility requirement, though it can be relaxed in cases of disability or death.
What if an Employee is Terminated After Five Years?
Employees who are terminated after completing five years of continuous service are still eligible for gratuity.
What is Ex Gratia?
If the calculated gratuity exceeds ₹10 lakhs, the extra amount is considered ex gratia and is typically awarded at the employer’s discretion.
