What is gratuity?
In line with the Gratuity Payment in India Act of 1972, any company with over 10 employees must provide gratuity to workers who have served for over 5 years continuously. Employers have the option to pay gratuity directly or opt for a general gratuity insurance plan through a service provider.
Gratuity is a financial token of appreciation given by employers to employees for their service during employment. While it's commonly given upon retirement, it can also be provided earlier if certain company conditions are fulfilled.
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How is gratuity calculated?
The calculation of gratuity depends on two major factors: The last drawn salary, and the number of years of service an employee works for the organization. As per the Payment of Gratuity Act 1972, gratuity should not exceed an amount of 20 Lakhs.
Gratuity = ( Number of year * Last drawn basic salary plus DA * 15 ) / 26
For example, if an employee has worked with an organization for 20 years and had Rs. 25,000 as their lat drawn basic salary plus DA, then,
Gratuity = ( 20 * 25,000 * 15 ) / 26 = Rs. 2,88,461.54
However, if an organisation is not part of the Gratuity Act, they can still pay gratuity. The calculation is based on the employee’s half month’s salary for every year that has been completed. The salary includes commission (sales based), dearness allowance, and basic salary.
Gratuity = ( 15 * Last drawn salary * Period of service) / 30 days
For example, if an employees has been at a company for 10 years and 8 months and their salary is Rs. 50,000, the calculation of the total amount of gratuity is done as follows:
Gratuity = (15 * 50,000 * 11) / 30 = Rs. 2.75 lakh
People Also Ask
Do you have to work continuously for five years to be eligible for gratuity?
Yes, according to the Gratuity Payment Act in many jurisdictions, an employee typically needs to complete five years of continuous service to be eligible for gratuity.
Does gratuity fall under the Cost to Company (CTC)?
Gratuity is not usually included in the Cost to Company (CTC) calculation. It's typically considered as a separate benefit provided by the employer to the employee upon meeting certain criteria, such as completion of a specified period of service.
How can I designate someone to receive my gratuity if I pass away?
To nominate someone for your gratuity in case of death, fill out the required forms provided by your employer.
When you join a company, do you need to fill out Form F to nominate one or more heirs for your gratuity amount?
No, you usually don't need to fill out Form F when joining a company to nominate heirs for your gratuity amount.
How many days will it take for the employer to remit the gratuity amount?
The time it takes for the employer to remit the gratuity amount can vary depending on company policies and procedures. Typically, it's paid out within a specific period after the employee's exit from the company, such as within 30 to 90 days.
Are PF and gratuity the same thing?
No, PF (Provident Fund) and gratuity are different. PF is a retirement savings scheme where both employer and employee contribute, while gratuity is a lump sum payment from the employer to the employee as appreciation for long-term service.
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