What is Gratuity?
Gratuity is a financial benefit paid following the Payment of Gratuity Act of 1972. It is a sum of money that an employee receives from his or her employer as a form of recognition for rendering services to the company or firm, as the case may be.
Typically, it is a part of the salary that aims at designing an employee’s future years after retirement. It should be noted that gratuity is payable to an employee only when he or she has completed a minimum tenure of 5 years with a particular company.
What are the eligibility criteria?
Gratuity is payable under the following conditions:
- An employee is eligible for retirement.
- An employee retires from the service.
- An employee quits after completion of 5 years with the same employer.
- An employee suffers from disability due to accident or illness, or in case of death, the amount is paid to the nominee.
How is Gratuity calculated?
The amount of gratuity depends on the tenure of service and the last drawn salary. As per the Payment of Gratuity Act, 1972, the non-governmental employees are categorized into two sections.
The first category includes employees who are covered under the act. The second category includes employees who are not covered under the act.
Gratuity calculation for employees covered under the act:
There is a simple formula to calculate gratuity. This formula is applicable for calculating the gratuity of employees who are covered under the Gratuity Act of 1972.
Gratuity Amount = (Tenure of service in one company X Last drawn salary including dearness allowance X 15) / 26
Here, two important points have to be kept in mind:
- Firstly, according to the Payment of Gratuity Act of 1972, the total gratuity amount cannot exceed Rs. 20, 00, 000. Any excess amount shall be considered as ‘ex-gratia’.
- Secondly, when the total tenure of service of an employee is more than 6 months, the number of years would be rounded off to the nearest figure.
Gratuity calculation for employees not covered under the act:
Gratuity is calculated differently for employees who are not covered by the said act. In this case, an employee’s half month’s salary is considered which includes basic salary, dearness allowance, and sales-based commission.
Gratuity Amount = (15 X Last drawn salary X Tenure of service) / 30
In the event of an employee’s death, the gratuity amount payable depends on the number of years served. The maximum benefit cannot be more than Rs. 20, 00, 000.
When can gratuity be forfeited?
As per the Payment of Gratuity Act of 1972, an employer has the lawful right to forfeit the payment either partially or entirely under two conditions:
- The employee has been terminated for any form of disorderly or lawless conduct or any act of violence during the employment.
- The employment of an employee has been discontinued for any act that involves moral degeneration, provided that the wrongdoing is committed during the course of the employment.