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Home Finance 5+1 Questions About Gratuity Payment Answered

5+1 Questions About Gratuity Payment Answered

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Unless you have been living under a rock or have never been around the salaried class, you must be aware of the Gratuity Benefit. 

 

What is Gratuity?

Going by the definition, it is a sum of money paid by an employer to its employees at the end of their employment term as a tip for contributing to the company. It is a simple monetary way of showing gratitude to the workforce and acknowledging their effort and dedication. Gratuity is a part of the employee income which is partially tax-free. Although the entire gratuity money is not exempted for all employees, a part of the income is exempted u/s 10(10) for every employee. The provisions of gratuity are regulated as per the Payment of Gratuity Act, 1972.

 

When is Gratuity amount paid?

The eligibility criteria for getting gratuity benefit is to complete 5 years of service with the same organization. It is one of the many special retirement benefits given to working professionals as they leave a job after continuously working for over 5 years. It is payable in the following cases: 

  • On Retirement or Superannuation
  • On Resignation or Termination (the gratuity amount can be withheld/rejected if it is due to misconduct of the employee)
  • On Death or Disablement from accident or disease (in this case, the amount will be paid to the nominee or legal heir and continuous service of 5 years is not necessary in this case) 

 

Who is the Gratuity Act applicable to?

The employees working in a factory, mine, oilfield, port, railways, plantation, shops, establishments or educational institution which has an employee base of 10 or more on any day in the past 12 months, are entitled to gratuity. Nevertheless, gratuity is applicable to you even if the number of employees in your organization goes below 10 after the Gratuity Act has become applicable to your employer once.

 

How does Gratuity payment work?

Employers sometimes offer a gratuity amount to their employees out of their own funds out of their own discretion. They may also approach a life insurer and invest in a group gratuity plan. In this case, annual contributions are paid as decided by the insurer. Substantially, the entire gratuity amount is paid by the employer. However, the employee is free to contribute to his gratuity fund, if wanted. Then, the insurer is paid with the gratuity by the insurer basis terms and conditions of the group gratuity scheme.

 

How to calculate Gratuity?

This a frequently asked question about the gratuity benefit. The gratuity amount is dependent on the tenure of employment and last drawn salary of the employee.

 

Gratuity Calculation Formula

Number of completed years of service (A)*basic salary last drawn plus dearness allowance (B)*15/26.

One can calculate his/her gratuity amount with the help of the following formula:

Gratuity = A*B*15/26

Here, ‘A’ = The service tenure completed by an employee in an organization

‘B’ = Basic Salary last drawn by an individual + the dearness allowance

‘*’ = Sign of multiplication

Now that you know how to calculate Gratuity, it’s a smooth sail from here. 

 

How is the Gratuity paid?

As discussed earlier, after completing 5 years of service with a single organization, the employees are eligible for obtaining the gratuity amount. So, at the time of full and final settlement after the eligible employees resign from the company, they will be paid the gratuity amount by the employer.

Also Read: The Brief Businessman’s Guide to Labour Laws in India

Again, if you were actually living under a rock or had never talked to a working professional in your life, the aforementioned points are more than enough for you to understand the fundamentals of Gratuity.

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