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What is Gratuity? How to Calculate It, and Its Benefits and More

What is Gratuity? How to Calculate It, and Its Benefits and More-When an employee’s retirement time comes, financial security becomes his prime concern. Many questions arise regarding what will be the next step after the income from employment stops. In such a situation, the government and private sector companies have made many provisions to provide financial security to the employees. One of the important ones is gratuity.

What is gratuity?

Gratuity is a lump sum amount of money given to an employee on his retirement or leaving the job for the long period of service he has rendered to the organization. This amount is based on the salary and tenure of the employee.

The provision of gratuity has been made under the Payment of Gratuity Act, 1972 of the Government of India. The objective of this law is to protect the interests of employees working in all types of sectors and organizations.

Conditions for receiving gratuity

The most important condition is that the employee must have been working continuously for 5 years in a particular organization. However, in some exceptions this period may also be less. For example:

  • If the employee dies during service or becomes disabled, the condition of minimum service period of 5 years will not be applicable.
  • Under the new wage code, there is a possibility of reducing this service period to 1 year, which will benefit crores of employees.
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Further, gratuity will be payable only if the employee has not been dismissed for any disciplinary reasons during his service.


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calculation of gratuity

Gratuity is calculated based on a certain formula, which is as follows:

Gratuity amount = (Last basic monthly salary) x (15/26) x (Service period in years)

In this formula, 15/26 means that the gratuity is equal to 15 days’ salary in a year. The number 26 comes here because there are on average 26 working days in a month (except holidays).

For example, if an employee served for 7 years and his last monthly basic salary was Rs 60,000, his gratuity will be calculated as follows:

Gratuity = 60,000 x (15/26) x 7 = Rs. 2,53,846

Thus, the higher the service period and salary, the higher will be the gratuity amount.

Right to appeal if the company does not pay gratuity

In some cases it is possible that the company may not give gratuity without any reason. In such a situation, the employee can lodge a complaint with the Labor Commissioner office of his area. This office will take the decision after hearing both the sides.

If the employee’s claim is found to be true, the company will not only have to pay the entire gratuity amount but will also have to pay interest and penalty on it. This will provide justice to those employees who have worked in the company for a long time.

Benefits of Gratuity

Gratuity provides several benefits to employees:

  1. Financial Security: Receiving a lump sum amount after retirement reduces the worries about living.
  2. Incentives: Employees are encouraged to remain in the same organization for a long time.
  3. Tax exemption: There are provisions for income tax exemption on gratuity which increases the total amount.
  4. Family Security: If the employee dies, his dependents get the benefit of gratuity.
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Thus, gratuity is a great incentive and economic facility that helps the employee to prepare better for his/her old age life. This is why many other governments and companies around the world also provide such systems.

in conclusion

Gratuity protects the interests of employees and encourages them to remain employed in the same organization for a longer period. This guarantees financial security for their post-retirement life.

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