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Gratuity

What is Gratuity?

Gratuity is the amount paid by the employer to the employee for rendering the services for a certain period of time. It is usually paid at the time of retirement of an employee but can also be paid during the service.

Gratuity on a routine basis is earned by an employee by rendering at least five years of continuous service with any employer with no service break. It is a reward for the employee because of serving a certain long period of time with one company.

As in several countries, gratuity is also known for tipping. The tipping in some developed countries is paid to the services offerings persons as per the willingness of the customer’s delightfulness due to services gained. But it is mandatory here to mention that the tip receiving should be declared as income for tax purposes to be paid by the receivers to the State concerned departments.   

Who is Eligible to receive Gratuity?

An employee who has served for continuous five years with one employer is eligible for gratuity receiving. Although it is paid at the retiring time of the employee that can also be paid within the service time period, provided the employee has met the condition of serving five years with the employer. What is important is that it is also paid by the employers on account of any accident, disability, worse case scene, or the death of an employee.

What is Law for Gratuity?

As per the Payment of Gratuity Act 1972, the amount of gratuity should not exceed two million. This act categorizes non – government employees within dual classifications:

Both aforementioned types of gratuity have 15 last drawn salaries bracket gratuity is to be paid with slight differences. The former has the formula of tenure of work divided by twenty-six and the later tenure of work divided by thirty.

How Gratuity is calculated?

Two major elements are the defining principles for the gratuity calculation. One is the total number of years an employee rendered services and the last drawn salary.

For every year of rendering services by an employee, the 15 days wages are accumulated towards the gratuity of an employee which is to be paid by the employer.    

What is the Formula for the calculation of Gratuity?

Total Gratuity Payable = (Salary Last drawn) X (15/26) X (Total years services rendered)

For example:

If your employee had joined you in 2016 and resigned in 2021 completing her / his 5 years of total continuous service. S/he drawn a salary starting from USD 2,000 and her / his last drawn salary was USD 3,500 and that was in the year 2018.

Total number of years services rendered = 5
Last Drawn Salary = 3,500 USD
26 days for a month considered and 15 days as working at east = 15 /26
Therefore, = 5 X 3500 X 15/26
Total Payable Gratuity = 10, 096 USD

Tax Note: It should be noted that the entire amount of gratuity is tax-exempted.

How does Gratuity Nomination work?

After one year of successful completion of the job of an employee, being the employer you should get the nomination forms signed from your employee - within 30 days - to nominate one of the members of her / his family for Gratuity to be given in case the employee is dead. And, if the nominee is not a family member, that nomination is not acceptable. Moreover, if the nominee is deceased before the employee, the nomination gets on back reverted to the employee concerned who nominated her / his gratuity funds.

It is noteworthy that the employers must pay the gratuity amount to the employee or the nominee, as the case may be, within 30 days from the date of application, failing which the penalties may be imposed in the form of the government regulations in force. Gratuity should be paid in cash unless otherwise is claimed by the applicant and then maybe in the form of pay order or demand draft etc.

How the Payments of Gratuity in case of the Death of your employee can be made?

The employers must note that the gratuity is paid as per mentioned below rates in case of death of an employee, to be paid to a nominee:

Total Tenure of Services rendered by the EmployeeGratuity Amount Payable
Lesser than a yearDouble of the basic pay
More than 1 year till 5 years6 times of the basic pay
5 years plus till 11 years12 times the basic pay
11 till 20 years20 times the basic pay
20+ yearsHalf of every 6 months completed period but till a maximum of 33 times of the salary

Is there any possibility of any deductions in the Gratuity applied for?

Of course, deductions can be done from the employee gratuity. Any damages done to the organizational property or willful leaves or negligence etc. can be deducted from the amount of the gratuity.

Can Gratuity be Forfeit / Confiscate?

Yes, forfeit of the Gratuity is possible only if an illegal action, violence, moral offense; and/or gross misconduct is proved on part of the employee.  

Is there any maximum limit of Gratuity to be calculated and paid?

Yes, as per Gratuity Act 1972 there is a maximum limit for Gratuity calculation and payment for Government Employees, Covered under Act employees, and Non-covered employees up to Rs.2 Million.