What is gratuity and how does it work? Are you eligible for it? Gratuity is a financial acknowledgement provided by employers in India to show gratitude for the long-term commitment of their employees.

In this article, we will delve into the eligibility criteria for gratuity, explore different scenarios in which it can be claimed, and understand how the calculation is done.

Eligibility Criteria for Gratuity

To be eligible for gratuity, an employee must have completed a minimum of five continuous years of service with the same employer. However, there are exceptions to this rule. If an employee’s service is terminated due to death or disablement, they are eligible for gratuity regardless of their length of service. Additionally, under certain conditions, employees who have completed four years and seven months of service can also qualify for gratuity.

Gratuity can be claimed not only at retirement but also in various other situations such as superannuation, resignation, death or disablement, retrenchment, voluntary retirement, or termination initiated by the employer without the employee’s fault.

It is important to note that organizations employing ten or more individuals over the past year are required to provide gratuity.

Remember, gratuity is just one aspect of financial planning, and it is essential to consider other investment avenues like the  life insurance policies to safeguard your future.

Examples: Scenarios Where Gratuity Can Be Claimed

To understand the practical application of gratuity eligibility criteria, let’s look at a few examples:

Mr. Kumar has been working with XYZ Company for seven years when he decides to resign and pursue higher studies. Since he has completed more than five years of continuous service, he is eligible for gratuity.

Ms. Sharma works for ABC Corporation, which unfortunately goes bankrupt. Despite the company’s financial situation, the employees are still entitled to receive their gratuity payments as per the regulations.

Mr Singh meets with an accident while working and becomes permanently disabled. Even though he has not completed five years of service, he is eligible for gratuity due to the nature of his disability.

One should not rely only on gratuity but also invest in insurance policies like life insurance. Research on different types of life insurance and invest early in a plan that suits your requirements.

How to Calculate Gratuity

The gratuity amount depends on two factors: the employee’s last drawn salary and their tenure with the company. The calculation differs based on whether the organization is covered under the Payment of Gratuity Act, 1972 or not.

For employees covered under the Act, the gratuity calculation formula is as follows:

Gratuity = (15 × Last Drawn Salary × Number of Working Years) / 26

Here, the Last Drawn Salary includes Basic Salary plus Dearness Allowance (DA), and one working year is recognised upon completion of six months or more in a year.

Let’s consider an example:

Working Period of Ms X = 11 years and 8 months

Number of working years = 12 years

Last drawn salary = ₹75,000

Total Gratuity = ₹519,230

For employees not covered by the Act, the formula changes as follows:

Gratuity = (15 × Last Drawn Salary in Last 10 Months × Number of Working Years) × 30

In this case, the Last Drawn Salary includes Basic Salary, DA, and commissions. One working year is counted upon completion of each full year.

Here’s an example:

Mr Y has been working for Z Corporation for 14 years and 7 months (counted as 14 years). His last drawn salary over the last 10 months has been ₹75,000. The gratuity amount for Mr Y would be ₹525,000.

Important Factors to Consider

• Gratuity Limit: The maximum gratuity amount that can be paid is capped at ₹20 lakh. Any amount above this is considered ex-gratia and voluntary.
• Rounding Off Tenure: When calculating the number of working years for gratuity purposes, any service period beyond six months is rounded off to the next full year.
•  In the Event of an Employee’s Death: If an employee passes away before receiving their gratuity payment, it will be disbursed to their nominee or heir as per the gratuity regulations.
•  Employer’s Right to Forfeit Gratuity: In cases of termination due to employee misconduct, the employer has the right to forfeit the gratuity amount.
• Gratuity during Bankruptcy: Despite an organization going bankrupt, they are still legally obliged to fulfill their gratuity commitments.
•  Delayed Gratuity Payment: If an employer fails to pay gratuity within 30 days from the termination of employment, they are required to pay interest as specified by the Central Government for long-term deposits.

Summary

Gratuity is an important financial benefit that provides security and appreciation for long-term service. By understanding the eligibility criteria and calculation process for gratuity payments, individuals can plan their finances better. Remember to consider factors such as the maximum gratuity limit and the rights of employees and employers in different circumstances. To ensure a financially secure future for you and your loved ones, explore the options available and make informed decisions. 

Published by: Holy Minoza