A gratuity is a lump sum financial payout given by an employer to an employee as a token of appreciation for their long-term and continuous service. However, not every employee is eligible to get gratuity. Only employees who have completed certain years of continuous service are eligible to receive gratuity from their employers.
The gratuity amount is based on an employee’s last-drawn wages from an employer, length of service and eligibility under the Code on Social Security, 2020.
In this write-up, we will discuss how gratuity is calculated, who can claim it and when an employer is liable to pay gratuity to their employees.
Also know how much gratuity you can get if your last-drawn wages from an organisation is Rs 50,000 a month and you have completed 10 years of service.
Who is eligible for gratuity?
Section 53 of the Code on Social Security, 2020, sets out the following conditions.
An employee generally needs to complete at least five years of continuous service to be eligible for gratuity on retirement or resignation.
The same five-year requirement applies in case of superannuation.
However, this condition does not apply if the employee dies or suffers disablement.
Employees whose fixed-term employment contracts expire are also covered without the usual five-year service requirement.
For working journalists, the specified qualifying period is three years.
Gratuity conditions for fixed-term employees
Under the Code on Social Security, 2020, fixed-term employees are specifically covered by a separate provision that provides for proportionate gratuity even if their employment does not extend to the usual qualifying period. This provision appears in Section 2(34)(b).
Gratuity calculation for employee with Rs 50,000 last-drawn monthly pay and 10 years of service
Under Section 53(2) of the Code on Social Security, 2020, the regular rate is 15 days' pay for each completed year of service or part of a year exceeding six months depending on the last-drawn wages of the employee.
For a monthly-rated employee, the Act specifies this calculation:
Gratuity = Last-drawn monthly wages x 15 x service years/26
The last-drawn pay/wage here is basic pay, dearness allowance or retaining allowance, if any.
If the applicable last-drawn monthly wages are Rs 50,000 and the employee has completed 10 years of service:
Gratuity = Rs 50,000 x 15 x 10/26
Gratuity = Approximately Rs 2,88,462
What counts as continuous service for gratuity calculation?
Section 54 of the Code on Social Security, 2020, refers to the definition of counting service for gratuity calculation.
Continuous service may include interruptions due to sickness, injury, leave, lay-off, strike, lockout or suspension of work not occasioned by the employee, subject to the provisions of the Act.
Where service is not continuous, the Act provides deemed-continuous-service thresholds for ordinary establishments:
- Period being assessed Minimum days actually worked
- One year 240 days in a general establishment
- One year 190 days for an employee working below ground in a mine or in an establishment working fewer than six days a week
- Six months 120 days in a general establishment
- Six months 95 days for the specified mine or fewer-than-six-day-week category
When is the employer liable to pay gratuity?
Section 56 of the Code on Social Security, 2020, establishes a duty on the employer to:
- The employer shall calculate the amount of gratuity when it becomes payable, even if the employee has not made an application.
- The competent authority and the individual entitled to the amount must be informed in writing of the amount.
- Payment shall be made within 30 days from the date on which gratuity becomes payable.
- If payment is delayed, interest is normally due on the delay. This shall not be applicable in case of delays attributable to the employee and accepted in writing by the employer from the appropriate authority.