Gratuity | Meaning and Definition

What is gratuity?

Gratuity means a mandatory benefit that is received by an employee from an employer for the services he offered to an organization provided the employee should complete five years or more (the gratuity period) in the same organization. The gratuity eligibility is strictly five years (gratuity minimum period) or more than five years in the same organization.

Gratuity is a benefit an employee can offer from an organization under the Payment of Gratuity Act 1972.

What is a Gratuity in salary?

Gratuity is a part of the salary received by an employee for their service in the organization.

What are the criteria for gratuity eligibility?

• Upon the retirement of an employee.
• When an employee resigns the job after five years of working for the same organization.
• Upon an employee’s sudden death or unexpected accident or illness.
• For the gratuity amount, an employee in the organization should have superannuation eligibility.

What is the formula to calculate gratuity?

The Gratuity formula is

Gratuity = Total number of years of service in an organization * The basic salary which was drawn last (last drawn salary) and the dearness allowance * 15/26.

Let us explore the calculation of gratuity with an example. Consider X is an employee who worked for the organization named Y for twenty years. X has an amount of 25,000 rs/- (last drawn salary and the dearness allowance) in his hand; what is the gratuity amount of employee X?

Gratuity amount for X = 20 * 25,000 * 15/26

The Gratuity amount earned by employee X will be 2,88,461.54 rs/-