What is gratuity? Calculation, eligibility, and all you need to know

Did you know? If gratuity isn't paid within a month of employment ending, employers owe interest as set by the Centre. Discover everything there is to know about gratuity

Gratuity

Gratuity is a token of appreciation, a way of showing gratitude for an employee's long-term commitment. Photo: Shutterstock

4 min read Last Updated : Mar 20 2024 | 8:41 AM IST

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Gratuity is a token of appreciation, a way of showing gratitude for an employee's long-term commitment. In India, it is governed by the Payment of Gratuity Act of 1972. This legislation specifies when an employee is entitled to gratuity, how it is calculated, and the responsibility of employers to ensure timely disbursement.

What is gratuity?

Gratuity is a financial acknowledgment provided by an employer for the employee's service to the company, reserved for those who have completed a minimum of five years with the company. The Payment of Gratuity Act of 1972, which establishes the framework for gratuity, applies to various sectors, including government departments, defence, local governing entities, and certain private organisations, provided they meet predefined conditions.

Criteria for gratuity eligibility Employment criteria for gratuity:

An employee must have completed five continuous years of service to be eligible, with certain exceptions for periods of absence due to strikes, lockouts, accidents, leaves, layoffs, unauthorised absence, or termination initiated by the employer.

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Gratuity is payable not only at retirement but also in various other situations such as: - Superannuation - Resignation - Death or disablement - Retrenchment - Voluntary retirement

- Termination (without the employee's fault)

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Organisations employing 10 or more individuals over the past year are required to provide gratuity. For non-mining roles, a year constitutes 240 working days; in mining sectors, it's 190 days. In some private sector firms, gratuity is paid after 10 years of service.

Exceptions to the Five-Year Rule Two exceptions allow for gratuity eligibility before the five-year mark:

— Termination due to death or disablement: Employees are eligible regardless of service length under these circumstances.

— The 4 Years 240 Days Rule: Employees can qualify with just four years and seven months of service under certain conditions.

How to Calculate Gratuity?

The gratuity amount depends on the employee's last salary and their tenure. The calculation differs based on the organisation's coverage under the Payment of Gratuity Act, 1972.

According to Paisa Bazaar, the gratuity calculation formula for employees under the Gratuity Act is as follows: