Gratuity is a lump sum amount paid by the employer to the employee as a token for the services they have offered towards the organisation. Since the concept of gratuity is a sign of gratitude and a function of culture, different countries have different gratuity limits that are laid down by employers.
When Will I Receive the Gratuity?To be eligible to get the gratuity amount, the company must be having a minimum of 10 employees who are drawing a salary from the company. People who are on contract are not considered in this case.
The employer usually pays the gratuity amount to only those employees who have completed tenure of 5 years or more at the organisation. Once the employee quits the job after the completion of 5 years, the gratuity amount is calculated using the gratuity formula. The amount is then transferred to the employee.
If the employee dies during the tenure, then the 5-year rule is relaxed. Even if the employee hasn’t completed five years, they are eligible to receive the gratuity amount.
How Does the Gratuity Calculation Work?The government passed the Gratuity Act in the year 1972, and it covers a wide range of employees in different sectors of the industry. The Gratuity Act has laid down a mathematical formula to calculate the gratuity amount for every employee.
The formula takes into account the number of years the employee has worked in an organisation and the last drawn salary of the 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 15 years and the last drawn basic salary including DA is INR 18000, then the gratuity amount will be:
Gratuity Amount = 15 x 18000 x 15/26 = INR 1,55,769
The number of years for the gratuity calculation is rounded off to the nearest number. For example, if the employee has worked for six years and seven months, it is rounded off to seven years, and if the employee has worked for five years and four months, then the number of years is considered as five only
Though the employer is free to provide the employee with more gratuity amount than the one obtained using the formula. But this amount cannot exceed a maximum of 10 lakhs. Unlike the provident fund, the gratuity amount is entirely paid by the employer with no contribution for the employee.
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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