What is gratuity?
Gratuity is a monetary compensation received by an employee from the employer. It is an acknowledgement of the work they have done and the services they have provided to the organisation over the course of their tenure. Gratuity is paid only once, generally when the employee decides to retire or resign after completing five years of employment. Gratuity can also be awarded if the employee suffers from a serious illness, becomes disabled because of an accident, or passes away.
The gratuity eligibility criteria mostly remain the same, but the amount of gratuity given to any employee differs across organisations. Typically, it is considered as a part of the employee's salary and is paid to them when they leave the work after having served for at least five years. Ideally, gratuity was designed as an aid to provide employees with financial security and stability after they leave a job, especially after a long period of service.
Gratuity eligibility in India
To be eligible for gratuity, an employee needs to meet specific conditions:
- The employee must complete a minimum of 5 years of continuous service.
- This five-year period should be uninterrupted, without any breaks.
- The employee must be eligible for the company’s superannuation or pension scheme.
- The employee must either resign or retire from their position.
However, an employee may be entitled to gratuity before completing five years if they experience a critical illness or a disability caused by an accident. Additionally, a nominee can claim the gratuity amount if the employee passes away while still employed.
Gratuity eligibility of an employee who has worked for less than 5 years in a company
As discussed earlier, the gratuity eligibility criteria require an employee to complete five years of consistent service before they are eligible for gratuity. However, there is an exception to this criterion, as mentioned in the provisions of the Gratuity Act, which enables the employee to get their share of gratuity even when their tenure of service is 4.8 years or less.
Take, for instance, you decide to switch to a company that is not only promising but also more lucrative. When you ask for your gratuity for the number of years served, you are denied by the former company since you could not complete a period of 5 years. In this case, you still have a chance to claim gratuity, provided you meet these specific gratuity eligibility conditions as per the Gratuity Act:
- In order to receive gratuity, the minimum period of service must be 5 years before the employee decides to switch.
- If the company operates five days a week, the gratuity eligibility is equal to four years and 190 days.
- If the company has a six-day work week, the employee has the right to claim gratuity after serving the company for a period of 4 years and 240 days.
How to calculate gratuity
You can calculate gratuity using the below formula:
Gratuity = N * B * 15/26
Where,
N is the total number of years you have worked for the company.
B is your last drawn basic salary, which includes the Dearness Allowance.
15 represents the 15 days' worth of wages.
26 denotes the number of days worked in a month except Sundays.
You can also use the gratuity calculator to know your gratuity amount
What are the recent updates in the Gratuity Act
Following are the gratuity eligibility criteria:
- The Act has introduced new rules that protect contractual workers by introducing provisions for social security and allowing them to become eligible for gratuity.
- Gratuity Act has made amendments to the service period of journalists by reducing the time from 5 years to 3 years for the ones who wish to quit or resign.
- If the employee of a company passes away before completing five years of work, the family members can claim gratuity.
- If any employee becomes severely ill and cannot work, the clause that requires five years of total service can be waived.
- Recruits are eligible for allowances that have now been capped at 50% of their compensation.
- The provisions aim to enhance gratuity for senior employees with more than five years of dedicated service.
- The new Gratuity Act does not include any contributions from PF, allowances for transportation, bonuses, or any overtime payments from an employee's salary.
- The structure of the salary has undergone a complete reorganisation.
- The notice period served by an employee is also considered under the last working month and is eligible for salary.
Maximum gratuity amount payable to an employee
As per the Gratuity Act of 1972, the maximum limit for the gratuity receivable by an employee is set to an amount of Rs. 20 lakh for the entire working tenure of the individual. Even though the individual might have received several gratuity payments from numerous employers, the total of all the gratuity received cannot exceed Rs. 20 lakh.
Conclusion
Gratuity is an essential component of an employee's financial security, particularly after years of dedicated service. Understanding the eligibility criteria, exceptions, and calculation methods is crucial for employees and employers. While the Gratuity Act primarily requires a minimum of 5 years of continuous service, there are exceptions for cases of critical illness, disability, or death.
Ultimately, gratuity serves as a token of appreciation from employers, offering financial support during transitions and after retirement, with a maximum limit of Rs. 20 lakhs across one's career. Understanding these aspects will help you make informed decisions about your future financial well-being.
