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Gratuity Meaning

Gratuity is a retirement benefit given to employees by their employer as a token of appreciation and gratitude for the services rendered for 5 or more years at the time of superannuation, resignation, or retirement. However, in some exceptional cases like death and physical disability because of a disease or accident, gratuity can be withdrawn before 5 years.

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This Gratuity glossary covers-

  • Payment Of Gratuity
  • Gratuity Act 1972 Eligibility
  • Gratuity Calculation
  • Gratuity related Tax Liabilities
  • Gratuity Payment
  • Gratuity Forfeiture
  • Gratuity Application Form 
  • Gratuity Withdrawal
  • Gratuity Rules 2020
  • Gratuity Payment Automation

Let’s look at them successively, one at a time.

Payment of Gratuity Act 1972

An Act that governs the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments and matters connected in addition to that or incidental to it. It is a part of Industrial law established to provide social security to the workmen.

Gratuity Act 1972 Eligibility

As per Gratuity Act, an employee must complete full years of employment with the current employer, except in an exceptional case of employee death or disablement due to accident or illness. Gratuity is paid to employees in case an employee:

  • Is eligible for superannuation
  • Retires
  • Resigns
  • Passes away or is rendered disabled due to accident or illness (paid to the employee’s nominee)

Note: This act does not apply to individuals working under Central or State Government as their gratuity payment may be governed by some other act.

Gratuity Calculation

Gratuity amount can be calculated with the formula given below:

Gratuity= Last drawn salary x 15/26 x Numbers of years of service

In the above formula,

  • Last drawn salary= Basic Salary + Dearness Allowance
  • 15/26 stands for 15 days out of 26 working days per month
  • Years of service rounded off to the nearest complete year

Gratuity related Tax Liabilities

The gratuity amount received under the Payment of Gratuity Act is exempted from taxation up to Rs. 20 lakhs. The government increased the ceiling from Rs. 10 lakhs to Rs. 20 lakhs.

Gratuity Payment

After the employee applies the application for the gratuity amount, their employer must complete the payment within 30 days. If anyhow, the employer can’t pay the amount within the designated period, then the employer will be liable to pay simple interest on the amount from the date gratuity becomes payable at a rate decided in the Payment of Gratuity Act.

The payment mode of gratuity amount can be cash, demand draft, or cheque.

Gratuity Forfeiture

Gratuity entitlement can be forfeited in the following cases:

  • Employee has conducted inappropriate behavior or acted against the law
  • Offense is committed by an employee during their employment

A termination order with appropriate charges must be issued to the employee in case of forfeiture of gratuity, else the employee is eligible for gratuity.

Gratuity Application Form

To apply for gratuity, an employee must fill the following forms and submit to the designated authorities to start the process of gratuity:

  • The Employee (Form I)
  • Designated nominee of the employee (Form J)
  • Designated legal heir of the employee (Form K)

Gratuity Withdrawal

4.81% of the employee’s basic pay is deposited into the gratuity account every year by the employer. The deposited amount can be withdrawn by the employee after 5 years when he/she leaves the organization or at the time of retirement. Besides these two cases, an employee is not allowed to withdraw their gratuity’s amount (besides a few exceptional circumstances they leave mentioned above)

Gratuity Rules 2020

The Indian Parliament has approved several bills under the Labor Code to safeguard contractual or fixed-term workers. As per the new approved bills (w.e.f. April 2021), even if an individual is under a contractual or fixed term of one year of employment, then that individual is eligible to receive gratuity. Also, people working in the seasonal establishments will be benefited under new approved bills related to gratuity. Furthermore, the Government of India stated that contractual circumstances they workers to be provided with social security for the first time. So, as the government feels the need to secure employees, gratuity meaning or eligibility or related terms and conditions change.

Gratuity Payment Automation

Gratuity is one of the critical discussion points for the first time for both employees and employers. Therefore, the amount is not just a monetary benefit given to employees but an expression for showing gratitude towards employees for their honest and continuous services provided to the organization.

It can be calculated with the help of an online gratuity calculator or with HRMS software installed in the system of the organization. In addition, HRMS software offers payroll modules to calculate and keep track of the gratuity amount of their employees. Also, the software helps employees fill the forms, remind both employees and employers, and make the process of gratuity payment easier.

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Tarulika Jain

Hi.. I am Tarulika Jain. I work as a content writer in HROne. I am an Electrical Engineer by degree, and a pragmatic writer by profession. I bring you insights about Human Resource Management and how digitalisation can make your workplaces happier. When I’m not writing, researching and reading, I walk around the woods, sip my coffee and listen to Indie Music.

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