For a novice, a gratuity is – “a gift of money, which is paid over and above salary due for long service”. In case of employment, it is a kind of benefit and is similar to a bonus. This means that it is a portion of your salary given by your employer, for a long service rendered towards the growth of the company.
The Payment of Gratuity Act was passed in the year 1972, where the Government made it mandatory for all the employers to pay gratuity to its employees if there are more than 10 employees in the company.
We bring to you the top Frequently Asked Questions on gratuity and its operation.
Who is eligible for gratuity?
An employee who has completed five years of continuous service in the same organization is eligible to receive gratuity. The employee will get the gratuity on the termination of the employment after rendering continuous service for not less than five years.
When do you get the gratuity?
Well, it is payable on…
- Resignation or termination
- Death or disablement due to accident or disease
- Retrenchment or layoff
- Voluntary Retirement Scheme (VRS)
Tip: Check your ‘Full and Final Settlement’ papers to know whether you have received the gratuity amount.
Please note that the five years of continuous service is not applicable if employee’s service is terminated due to death or disablement. In this case, the heir or the nominee is eligible to receive the gratuity amount.
What about temporary or contractual employees! Are they eligible to receive gratuity?
Yes. If they are considered as employees of the organization. But it does not include ‘apprentice’.
If the period of service is 4.5 years or above. Will it be considered as 5 years?
You can get in touch with your HR department for more details.
What is the formula to calculate the Gratuity Benefit amount?
To calculate the gratuity benefit amount, there are two different formulas.
- In case of employees who are covered under Gratuity Act-
Apply the following formula:
Gratuity = Last drawn salary * 15/26 * No. of completed years of service
Where, Last drawn salary = Basic Salary + Dearness Allowance (DA)
Then, the next doubt arises… once you have completed 5 years, what is the method to calculate the number of months? Well, any service that is more than 6 months is considered as one year. For example, if your tenure in the organization was 7 years 6 months, then to calculate gratuity your tenure will be taken as 8 years.
- In case of employees who are not covered under Gratuity Act-
For employees who are not covered under the Gratuity Act (especially private company employees), the gratuity calculation formula is:
Gratuity = Average salary * ½ * No. Of years of Service
Where, Average salary = Basic Salary + Dearness Allowance + commission (as a percentage of turnover achieved by you, if any)
What is the limit that is received as a Gratuity Benefit?
As per the latest update, the Central government has decided to increase the gratuity payment limit from the existing Rs. 10 lakh to Rs. 20 lakhs.
Can you select a nominee for the gratuity?
Of course! You need to fill Form ‘F’ at the time of joining the company.
You must be seeking more clarifications, such as is gratuity taxable, what if the company is suffering from any financial loss, can they deny paying gratuity amount, etc. Try to Google more about it and you will find ample information available on the Internet.