Gratuity is the amount paid by an employer to the employee for the services rendered by him/her during the period of employment. Gratuity can only be given when the employee completes a minimum of five years of service with an organization. However, these five years must be continuous and there should be no gap in the services of the employee with that company.
Generally, employers pay gratuity at the time of retirement, but can also be paid during the period of employment. Gratuity is calculated based on the last drawn salary and years of service.
The Gratuity Act came into force in the year 1972.
Who is eligible for Gratuity?
An employee is eligible for gratuity only if he/she is eligible for superannuation and must have completed five years of continuous employment. Gratuity can also be paid by the employer in case of the death of an employee or if the employee becomes disabled due to an accident or any other worst-case scenario.
How is Gratuity calculated?
Gratuity calculation depends on two major factors that are last drawn salary and number of years provided by an employee as service. As per the Payment of Gratuity Act 1972, Gratuity should not exceed an amount of 20 Lakhs and the act has categorized non-government employees into two categories;
- Employees covered under the act
Gratuity calculation formula: 15 * last drawn salary * tenure of working / 26
- Employees not covered under the act
Gratuity calculation formula: 15* last drawn salary * tenure of working / 30