Gratuity, an essential component of employee retirement benefits, stands as a token of appreciation from the employer for long-term service. Unlike the Employee Provident Fund (EPF), where contributions are shared, gratuity predominantly rests as a responsibility of the employer.
What Exactly is Gratuity?
Gratuity serves as a recognition of loyalty towards a company. Typically, an employee becomes eligible for gratuity after completing a continuous service period of five years. However, discussions within the government regarding the reduction of this service period to one year under the New Wage Code could potentially extend this benefit to numerous employees.
When and How is Gratuity Received?
Usually received upon retirement, gratuity also applies if an employee leaves or changes jobs after completing a minimum service period of five years. In unfortunate instances such as death or disability during service, gratuity may be availed even with less than five years of service. Notably, if an employee has caused damage to the organization’s property during employment, it might be compensated from the gratuity.
Gratuity Calculation Formula:
Calculating gratuity is straightforward using the following formula:
Total Gratuity = (Last Basic Monthly Salary) × (15/26) × (Years of Service)
For instance, if an employee began their tenure in 2019 and resigned in 2024 with a basic monthly salary of Rs 10,000, the gratuity can be calculated as follows:
10,000 × (15/26) × 5 = Rs 28,846
It’s crucial to recognize that, according to the Payment of Gratuity Act, 1972, the calculation is based on 26 working days per month, excluding February, with the majority of months having 30 or 31 days.
Recourse for Unpaid Gratuity:
If an employee has completed a continuous service period of five years and has not engaged in any unlawful activities, they are entitled to receive the full gratuity amount. Should the company fail to fulfill this obligation, the employee can seek recourse by lodging a complaint with the District Labor Commissioner. In the event of a favorable decision, the company would be liable to pay the gratuity along with fines and interest.
