Gratuity is a lump sum amount paid by the employer to the employee as a token of appreciation for the services they have provided towards the company. It is important to know what are the eligibility and the amount of gratuity that an employee will receive.

What is Gratuity in Salary?

Gratuity is the monetary amount which is payable to the employee of an organisation under the Payment of Gratuity Act 1972. This is mainly paid to the employee as a token of appreciation for his/her services towards the company. Gratuity payment is one of the several components that make up the gross salary of the employee.

However, an employee is eligible to receive the gratuity amount only after they complete a period of 5 or more years with the company. It is generally a token amount paid by the company showing gratitude towards the employee for their services towards the organisation.

How Does Gratuity Work?

The employer may either pay their employees the gratuity amount from their own account or opt for a general gratuity insurance plan with a service provider. The company then pays annual contributions to the service provider, and in return, the insurance company can pay the gratuity amount to the employee, by following the policy rules and regulations. The gratuity amount is totally paid by the employer without any contributions from the employee.

What are the Eligibility Criteria to Receive Gratuity?

Here is the list to check if an employee is eligible to receive the gratuity amount from the employer or not:
  • They should be eligible for superannuation
  • They resign after working for five years with a single employer
  • They retire from work
  • They suffer disability or pass away due to accident or illness

How to Calculate Gratuity Amount?

Employers use a simple mathematical formula to calculate the gratuity amount they will be paying their employee. The gratuity formula is shown here:

Gratuity Amount = Y x S x 15/26

Where Y – Number of years worked in the organisation, S – Last drawn salary including DA

So for example, if an employee has been working for a company for 10 years and the last drawn basic salary including DA is INR 20000, then the gratuity amount will be:

Gratuity Amount = 10 x 20000 x 15/26 = INR 1,15,385

The employer is free to provide the employee higher gratuity, but according to the Gratuity Act, the amount cannot exceed Rs. 10 Lakhs. Anything above INR 10 lakhs, the amount is known is ex-gratia, which is a voluntary contribution and not compulsorily imposed by any law.

To calculate the number of years for the gratuity calculation, anything above 6 months is rounded off to the next number and anything below 6 months will be rounded off to the previous number. For example, if you have worked at an organisation for 8 years and 7 months, then the number of years will be calculated as 9 years whereas if an employee has worked for a company for 8 years and 4 months, then it will be considered as 8 years only.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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