Gratuity: Meaning, Eligibility, and Calculation

Meaning of Gratuity in Salary

Gratuity refers to the amount that an employer is required to pay his employee, in return for services offered by him to the organization. A Gratuity is a financial component that is offered by an employer to his/her employee in recognition of his/her service tenure rendered to an organisation. However, the gratuity amount is given only to those employees who have served a minimum tenure of five years in an organization, i.e., they are employed for more than five years. All the provisions and regulations related to Gratuity are governed by the Payment of Gratuity Act, of 1972. Also, in a case when the employee gets disabled due to any disease or disease, he/she will be eligible for gratuity payment even before the completion of five years of service in an organization. The calculation of Gratuity depends upon the last drawn salary and the number of years of service rendered to an organization. Normally, gratuity is paid at the time of retirement of the employee. However, an employee can claim during the active tenure of his/her employment.

Geeky Takeaways

• A gratuity is a monetary bonus granted by employers to employees as a show of appreciation for their loyal service to the firm.
• According to the Payment of Gratuity Act of 1972, employees must normally have worked for the employer for at least five years before being entitled to gratuity.
• The gratuity is computed using the employee’s last drawn salary and the number of years they have faithfully served the organization.
• Employees who are disabled due to disease may be eligible for a gratuity even if they have been with the company for less than five years.
• The Payment of Gratuity Act describes the requirements and regulations that govern the payment of gratuity, ensuring appropriate rewards for long-term work.

Who is Eligible for Gratuity?

According to the provision of Section 4 of the Payment of Gratuity Act 1972, it is mandatory for organizations to pay gratuity to employees who have rendered five continuous years of service. Following are the instances where the employees are eligible for gratuity:

1. Employee is eligible for superannuation.
2. Employee is retired from his/her service.
3. Employee has resigned after continuous service for five years with the organization.
4. In case of the death of an employee, the gratuity is paid to the nominee.
5. In case the employee is disabled due to sickness or an accident.
6. In case the employee has applied for a Voluntary Retirement Scheme (VRS).
7. In case of lay-off due to retrenchment.

Formula for Gratuity

Gratuity = n *b * 15/26

Where,

n= Number of years of service in an organization

b= Basic salary+ Dearness Allowance

15/26= Here, 15 refers to the half-month compensation of 15 days, and 26 represents the number of working days in a month (excluding Sundays)

How is Gratuity Calculated?

There can be two instances to calculate Gratuity:

For an employee whose employer is covered under the Gratuity Act

For an employee whose employer is not covered under the Gratuity Act

Rohit is employed in an organization for a period of 12 years. The last drawn basic salary of Rohit was ₹80,000 (including DA). Calculate the amount of Gratuity payable to Rohit by his company. Formula for the calculation of Gratuity = Gratuity= n*b*15/26 Where, n=Number of years of service in an organization b= Basic salary+ Dearness Allowance Hence, Gratuity= 12*80,000*15/26 Gratuity= ₹ 5,53,846/-

Rohit is employed in an organization(Not covered by the Gratuity Act) for a period of 12 years. The average salary for the last 10 months amounts to ₹70,000 (including DA). Calculate the amount of Gratuity payable to Rohit by his company. Formula for the calculation of Gratuity = Last 10 months average salary*Number of completed years of service*1/2 Hence, Gratuity= 72,000*12*1/2 Gratuity= ₹ 4,32,000/-

Here, in Case I, two points of consideration are important, which are:

• As per the Gratuity Act, the amount of gratuity payable cannot exceed more than Rs 20 lakh. Any excesses above 20 lakhs shall be treated as ex-gratia.
• While calculating n in the formula, In case the employee has worked for more than six months in the last year of employment, then the figure shall be rounded to the nearest figure. In the case of the above example, if Rohit would have worked for 12 years and 7 months, the number of years shall be rounded off to 13. However, in case he has worked for 12 Years and 5 Months, then the number of years shall be considered as only 12.

Payment of Gratuity in case of Death of an Employee

As per the Payment of Gratuity Act, 1972, Employees are eligible to receive gratuity in case of death or disability due to any illness/accident. In case of the death of an employee, the nominee is eligible to receive the payment of gratuity. In cases due to death or disability, the amount of gratuity of the employee is calculated on the basis of the service tenure that has been served to the organization. However, the act has specified that 20 lakh is the maximum amount of gratuity that such an employee can receive. Following are the rates of gratuity, which are payable by the employer in such case-

Service Tenure	Rate at which Gratuity is payable
Service tenure is less than 1 year	2 times the employee’s basic salary
Service tenure is more than 1 year but less than 5 years	6 times the employee’s basic salary
Service tenure is more than 5 years but less than 11 years	12 times the employee’s basic salary
Service tenure is more than 11 years but less than 20 years	20 times the employee’s basic salary
Service tenure is 20 years or more	Half of the basic salary for each completed 6-month period (subject to a maximum of 22 times of employee’s basic salary)

Different Types of Forms of Gratuity

Form Name	Purpose
Form A	Notice of Opening
Form B	Notice of Change
Form C	Notice of Closure
Form I	Application for gratuity by an employee
Form K	Application for gratuity by a legal heir
Form J	Application for gratuity by a nominee
Form F	Nomination
Form G	Fresh Nomination
Form L	Notice for payment of gratuity
Form H	Modification of Nomination
Form N	Application for direction Before the Controlling Authority
Form O	Notice Issued by the authority to appear for a case hearing
Form M	Notice Issued by the employer to the employee stating the reason for a rejection
Form P	Summon issued by the authority to be present for the hearing
Form R	Notice Issued by the authority directing to make gratuity payment
Form T	Application for Recovery of Gratuity
Form U	Abstract of the Act and Rules

Frequently Asked Questions (FAQs)

1. What is Gratuity?

Answer:

Gratuity refers to the amount that an employer is required to pay his employee, in return for services offered by him to the organization. A Gratuity is a financial component that is offered by an employer to his/her employee in recognition of his/her service tenure rendered to an organisation.

2. Who is eligible for Gratuity?

Answer:

Following are the instances when the employee is eligible for gratuity:

• Employee is eligible for superannuation.
• Employee is retired from his/her service.
• Employee has resigned after continuous service of five years with the organization.
• In case of death of an employee, the gratuity is paid to the nominee.
• In case the employee is disabled due to sickness or an accident.
• In case the employee has applied for Voluntary Retirement Scheme (VRS).
• In case of lay-off due to retrenchment.

3. If an employee has served for a tenure of 7 years and 4 months, what will be the number of years of employment considered for the purpose of calculation of gratuity?

Answer:

While calculating n in the formula, In case the employee has worked for more than six months in the last year of employment, then the figure shall be rounded to the nearest figure. In the above case as employee has worked for a period of 7 years and 4 months than in such a case the number of years shall be considered as 7 years. However, in case he has served a period of 7 years and 7 months than the number of years shall be rounded off and will be calculated as 8 Years.

4. What is the formula for the calculation of Gratuity for an employee whose organization is not covered by the Gratuity Act?

Answer:

For an employee whose employer is not covered under the Gratuity Act:

Formula for the calculation of Gratuity = Last 10 months average salary*Number of completed years of service*1/2

5. Is there any limit for the amount of Gratuity, which can be received?

Answer:

As per the Gratuity Act, the amount of gratuity payable cannot exceed more than Rs 20 lakh. Any excesses above 20 lakhs shall be treated as ex-gratia.

6. Is the notice period considered under the Gratuity Act?

Answer:

Yes, the notice period is also considered for the purpose of calculating the tenure of service, as per the Gratuity act the the tenure of service is calculated from the day an employee has joined an organization till the last working day including i.e. notice period as the employee gets salary for that time as well.