As the name implies, gratuity is paid by an employer to the employee as a mark of appreciation of his/her service. It is an element of social security for the employee and is usually paid at the end of the service. The legislation governing the payment of gratuity was enacted in 1972 and is known as the Payment of Gratuity Act of 1972. Let’s see how gratuity is calculated following which formula and who is eligible to get it.
Most organisations pay gratuity to their employees if they complete 5 years of continuous service. However, periods of absence due to strikes, unauthorised absence, or termination for deficiencies of the employee are not entertained.
Gratuity calculator
Gratuity is paid according to a formula laid down in the legislation. It says Gratuity payable = (15 × Last Drawn Salary × Number of Working Years) / 26. Here last drawn salary means Basic Salary plus Dearness Allowance, as considered by the Employees’ Provident Fund or EPF. It is clear from the formula that the longer an employee works for a company, the higher will be the gratuity payout.
Six months rounded off
A point to remember is that if the period of employment exceeds six months, it is rounded off to the next full year. For example, if someone has worked 10 years 7 months, it will be treated as 11 years in the formula.
In the above formula, if the last drawn salary is substituted by Rs 1,00,000 and the duration of working periods is substituted by 12 years, the gratuity payable works out to be Rs 6,92,309 or Rs 6.92 lakh.
Paid in these conditions
Gratuity can be paid in the following conditions – superannuation, resignation by the employee, death of the employee or becoming physically disabled. Gratuity can also be paid in case of retrenchment. However, if the company terminates an employee on grounds of indiscipline or some similar reasons, gratuity is usually not paid. In case of death of an employee, the gratuity is paid to the legal heirs.
If a company employs 10 or more persons for one year it is supposed to pay gratuity. However, a point to note is that there is a ceiling on the payment of gratuity. It is Rs 20 lakh.
Like EPF, gratuity is a social security element for employees in India and was legislated in 1972. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
