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Gratuity – Check Gratuity Calculation Research Team | Posted On Thursday, April 25,2019, 04:02 PM

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Gratuity – Check Gratuity Calculation



What is Meant by Gratuity?

Gratuity is a monetary benefit given by the employer to his employee at the time of retirement. It can be defined as a benefit plan where the employee does not have to contribute anything from his salary. An employee is eligible to receive this benefit only if he has completed 5 years of continuous service under the same employer. Gratuity refers to the sum of money paid by the employer for the services provided by the employee in the company. Gratuity is administered by the Payment of Gratuity Act, 1972.

How  Does  Gratuity  Payment Work?

An employee is eligible to receive gratuity only if he has completed 5 years of continuous service under the same employer. An employer may opt to provide gratuity individually to each employee or may take a group gratuity plan with an insurance provider. The employer provides annual contributions to the insurer for a group plan. The employee can also actively contribute to his gratuity amount.

There is no prescribed percentage stated by law for the amount of gratuity an employee is eligible to receive. Gratuity payment depends upon two main factors: last drawn salary and years of service. To calculate how gratuity is payable, the Gratuity Payment Act has divided non- government employees into two categories:

  • Employees covered under the Payment of Gratuity Act
  • Employees not covered under the Payment of Gratuity Act

An employee will be covered under the Act if the number of workers working in an organisation is 10 or more than 10 throughout the year. Once an organisation comes under the purview of the Gratuity Act, then it will always remain covered even if the number of employees falls below 10 at any point.

Payment of Gratuity Act, 1972:

The payment of Gratuity Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and other such establishments which have more than ten employees. The gratuity amount, unlike provident fund, is totally paid by the employer without any contribution from the employee.

Eligibility Criteria for Gratuity Payment:

An employee is eligible to receive Gratuity only if he has worked in an organisation for 5 years. There are certain conditions when your employer is liable to pay you with the gratuity amount. The conditions are as follows:

  1. An employee should be eligible for superannuation.
  2. Gratuity must be paid when an employee retires
  3. An employee resigns after completing 5 years with a single employer
  4.  In case of death of an employee
  5. In case the employee suffers a permanent disability due to critical illness or accident.

SEE ALSO: How To Calculate Gratuity?

The Formula for Calculation of Gratuity Amount:

The calculation of the amount of gratuity can be done using the formula given below. The gratuity payment depends upon two basic components: years of service in the company and last drawn salary:

The Formula for calculation of gratuity amount: n*b*15/26

Here, n stands for the tenure of service completed in the company

B stands for the last drawn salary + dearness allowance

The above formula can be explained through an example:

Let’s say, Jignesh is an engineer who worked with ABC Company for 15 years. His last drawn basic along with dearness allowance is Rs. 50,000. Then the gratuity amount for Jignesh is:

Gratuity: 15*50000*15/26 = Rs. 4,32,692

Here two points need to be noted:

As per the Gratuity Act, the amount of gratuity cannot be more than a specified amount. The Government initiated the process for amendment to Payment of Gratuity Act, 1972 to increase the maximum limit of gratuity to such amount as may be notified by the Central Government from time to time. Previously the maximum amount was Rs. 10 lakh. Now the government has issued a notification specifying the maximum limit ofRs. 20 lakh. Any excess amount will be treated as ex-gratia.

Also, it must be noted that if the last few months in the last year of employment are more than 6 months, then it will be rounded off to the next number. Suppose your tenure of service is 16 years 7 months, then you receive a gratuity for 17 years. Otherwise, you will be paid for 16 years if it happens to be 16 years 4 months.

SEE ALSO: Payment Of Gratuity Act 1972

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