Everything You Need to Know About Gratuity


A gratuity payment is a means for a company to demonstrate appreciation to their staff for their long-term contribution to the company. This gesture of kindness is made mandatory by regulation. However, the employee must have completed at least 5 years of consecutive employment with the current company to be entitled to this gratuity pay-out, as stipulated by the laws.

Gratuity payments are often given at the moment of retirement, although they can also be claimed if you switch jobs after 5 years. This five-year criteria for gratuity payment, nevertheless, does not apply if the worker becomes handicapped (following an accident or sickness) or unexpectedly dies while still employed by the company.

This article will go over everything you need to know about gratuity.

Gratuity Act 1972

Implemented in September of 1972, the Payment of Gratuity Act (also known as the Gratuity Act) offered the idea of offering monetary benefits to staff members who have provided years of prolonged service to the company. This motivates the employees to spend more time on their current job which boosts employee retention rates for the organisation. The Gratuity Act is viable for every industry and organisation situated across the nation. It also applied to both the following types of employees:

  1. Workers who are covered under the 1972 Payment of Gratuity Act
  2. Workers who not are covered under the 1972 Payment of Gratuity Act

Companies or establishments that have currently hired 10 or more individuals are generally covered under this 1972 Payment of Gratuity Act, as per the current eligibility standards. State government as well as central government workers, on the other hand, are subject to their respective system of service gratuity laws that are not governed by the 1972 Gratuity Act.

Who is eligible for gratuity payment?

An employee can be eligible for gratuity payment if he or she meets the following criteria:

  1. The worker should be eligible for superannuation or retirement benefits from the company,
  2. The worker is retired,
  3. The worker should have completed at least a continuous 5 years of service prior to resigning,
  4. The worker is suffering from disability due to any illness or accident, or dead.

How to calculate gratuity?

As per the 1972 Payment of Gratuity Act, you can calculate your gratuity payment by following this formula:

G = T x S x 15/26


G means the total gratuity payment,

T means the number of years for which you have provided continuous service to the company,

S means the amount of the last salary received. Here salary includes both basic pay and dearness allowance.

However, there are two conditions that you have to note:

  1. The sum of gratuity pay-out cannot exceed Rs. 10 lakhs, in accordance with the Gratuity Act 1972. Nevertheless, if the company so desires, they may pay the worker a gratuity in excess of Rs. 10 lakhs. The sum beyond this Rs. 10 lakhs gratuity threshold is referred to as non-obligatory donations or ex-gratia.
  2. The overall number of months completed in the previous year of service also needs to be evaluated. If you served for further than 6 months in the last year, your employer will round up your employment to a full year. However, if it is shorter than 6 months, that particular year is not included in the computation of continuous service to the employer. Therefore, decreasing the gratuity payment amount.

Workers are not limited by regulation in their gratuity options, even if their organisation is not governed by the 1972 Gratuity Act. For completed employment years, this gratuity amount is computed on half of a month’s income. For the computation, the component of salary is the total base pay, dearness allowance and sales commission. The formula is as follows:

G = (15 x T x S) / 30


G means the total gratuity payment,

T means the number of years for which you have provided continuous service to the company,

S means the amount of the last salary received.

You can easily calculate gratuity amounts by using online gratuity calculator tools. This online tool can compute your gratuity pay-out value in just a few minutes after you input the necessary details including your number of service years and last salary received. These online gratuity calculators remove the chances of manual error in the calculation.

The bottom line

In conclusion, mandatory gratuity payments are a good means to motivate employees to remain committed to their job. Such contributions are usually made during the later years of an employee’s carrier and the value is not immediately realised. Hence, a gratuity payment ensures that the staff will be rewarded for all the years they have served the organisation. Now, if you want to calculate the amount of gratuity you will receive, you can either use the formula mentioned above or use online gratuity calculator tools.