Understanding Gratuity: The Payment of Gratuity Act of 1972 governs the payment of gratuities in India as a way of showing gratitude for an employee’s long-term commitment. This legislation specifies when an employee is entitled to gratuity, how it is calculated, and the employer’s responsibility to ensure timely disbursement of gratuity.
Understanding Gratuity: How does gratuity work?
For employees who have served the company for at least five years, gratuity is a financial reward offered by the employer. The Payment of Gratuity Act of 1972, which establishes the framework for gratuities, applies to a wide variety of sectors, including government departments, defence, local governing entities, and certain private organizations, provided they meet specified criteria.
Gratuity eligibility criteria
Employment criteria for gratuity:
Exceptions include periods of absence due to strikes, lockouts, accidents, leaves, layoffs, or termination initiated by the employer.
In addition to retirement, gratuities may also be paid in the following cases:
- Superannuation
- Resignation
- Death or disablement
- Retrenchment
- Voluntary retirement
- Termination (without the employee’s fault)
Organisational criteria
For non-mining roles, a year refers to 240 calendar days; for mining, it refers to 190 calendar days. In some private sector companies, gratuity is paid after 10 years of service.
Five-Year Rule Exceptions
- Before the five-year mark, gratuities are eligible under two exceptions:
- Employees who are terminated because of death or disability are eligible regardless of the length of their service.
- Under certain conditions, employees can qualify with just four years and seven months of service.
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Gratuity Calculation: How Do You Do It?
According to the Payment of Gratuity Act, 1972, the gratuity amount depends on the employee’s last salary and their tenure.
In accordance with Paisa Bazaar, the Gratuity Act calculates gratuities as follows:
Formula for Gratuity = (15 × Last Drawn Salary × Number of Working Years) / 26
In addition to Basic Salary, Dearness Allowance (DA) is included in Last Drawn Salary.
After completing six months or more in a year, one Working Year is recognized.
For instance:
- Working Period of Ms X = 11 years and 8 months
- Number of working years = 12 years
- Last drawn salary = Rs 75,000
- Total Gratuity = Rs 519,230
There is a slight difference in the formula for calculating gratuities for employees not covered by the Act:
Gratuity Formula = (15 × Last Drawn Salary in Last 10 Months × Number of Working Years) × 30
- The last Drawn Salary includes Basic Salary, DA, and commissions.
- Each full-year counts as one Working Year.
Example: For Mr Y, with a tenure of 14 years and 7 months (counted as 14 years) and a consistent salary of Rs 75,000 in the last 10 months, the gratuity would be Rs 525,000.
Key factors
- Any amount above Rs 20 lakh is considered ex-gratia, which is voluntary and not legally binding.
- For gratuity calculations, service beyond six months is rounded up to the next full year.
- According to gratuity regulations, the gratuity is paid to the nominee or heir.
- If you are terminated for misconduct, you may not be entitled to a gratuity.
- Even in bankruptcy, organizations are still required to pay gratuities.
- In the case of long-term deposits that are not paid within 30 days from termination, the employer must pay interest as specified by the Central Government.
