What is Gratuity in Salary And How to Calculate it?

Gratuity can be considered as a monetary gift from the employer to the employee for the services rendered to the enterprise. However, gratuity should not be viewed as a reward alone, but should also be seen as an instrument of providing social security to workers.

Gratuity is a cash benefit paid by an employer to the employee as a lump sum payment for past services. Gratuity becomes payable when the employment relationship comes to an end. The employment may terminate due to retirement, resignation, superannuation, disability due to disease or accident or death of the employee.However, to receive gratuity in case of retirement, resignation or superannuation, the employee should have rendered not less than five years of continuous service in the organisation.

The rules regarding payment of gratuity are stated in the Payment of Gratuity Act, 1972. This statute covers only certain specified establishments like fActories, mines, oilfields or other establishments employing ten or more employees, etc. Therefore, it is not necessary that every employee who has completed five years of service receives gratuity on the cessation of his services.To be eligible to receive gratuity, the employee should be covered under this Act. However, the employees not covered under this Act may also receive a monetary reward in the form of gratuity from their employers. But it shall not be a statutory requirement on the part of such employers to give out gratuity.

The quantum of gratuity payable will be fifteen days’ wages based on the rate of wages last drawn by the employees concerned for every completed year of service or part thereof in excess of six months, subject to a maximum of 15 months’ wages. The maximum stipulated benefit through gratuity is restricted to twenty lakh rupees.For employees covered under the Act, the minimum stipulated gratuity amount is :Gratuity = Last drawn salary x (15/26) x Number of years of serviceHere, the last drawn salary shall include basic salary plus dearness allowance and commission on sales.For employees not covered under the Act, the gratuity amount is :Gratuity = Last drawn salary x (15/26) x Number of years of service In Conclusion Thus, the payment of gratuity is the right of every employee covered under this Act as well as the obligation of every employer to which this Act applies. Ideally, the gratuity sum received should not be left idle but invested wisely.

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.