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.
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.
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:
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.
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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.
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
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.