Gratuity is a financial benefit given to employees as a token of gratitude for their service to an organization. It is a lump sum payment provided by the employer to an employee upon retirement, resignation, or in certain cases of termination. It acts as a form of social security for employees and recognizes their contribution to the company over the years.
Gratuity provides financial support to employees after retirement or during times of need. It acts as a reward for loyalty and long-term service to an organization, ensuring financial stability in later stages of life.
Gratuity Formula
The gratuity amount is calculated using the following formula under the Payment of Gratuity Act, 1972:
Gratuity = (Last Drawn Salary × Years of Service × 15) / 26
Where:
- Last Drawn Salary: Includes basic salary and dearness allowance.
- Years of Service: Total years of continuous employment with the same employer.
- 15/26: Represents 15 days’ salary out of 26 working days in a month.
Example: If an employee’s last drawn salary is ₹50,000 and they have worked for 20 years, their gratuity would be calculated as:
Gratuity = (50,000 × 20 × 15) / 26 = ₹5,76,923
The maximum gratuity limit for central government employees on retirement has been ₹25 lakh since January 2024. This is the highest gratuity ceiling ever for government employees and is a result of multiple revisions over the years.
A central government employee qualifies for retirement gratuity after completing at least five years of service.
Gratuity Hikes Over the Years
The gratuity ceiling has seen significant growth, especially since the 4th Central Pay Commission (CPC). The limit has increased by 2400% from ₹1 lakh to the current ₹25 lakh.
Historical Increases in Gratuity Limits:
- 4th CPC (1986): Recommended a gratuity limit of ₹1 lakh.
- 5th CPC (Interim Report): Suggested raising the ceiling to ₹2.5 lakh.
- 5th CPC (Final Report): Increased it further to ₹3.5 lakh.
- 6th CPC (2006): Raised the gratuity limit to ₹10 lakh.
- 7th CPC (2016): Recommended a gratuity ceiling of ₹20 lakh, with a provision to increase it by 25% whenever the Dearness Allowance (DA) crosses 50%.
- 2024 Update: Gratuity ceiling raised to ₹25 lakh after DA reached 50%.
7th Pay Commission’s Recommendations
In 2014, the 7th CPC noted demands to increase the gratuity ceiling beyond ₹10 lakh and index it to DA. The Department of Pension & Pensioners’ Welfare (DoPPW) supported the demand, stating the existing limit was insufficient for senior officers’ emoluments.
The 7th CPC agreed and recommended:
- Increasing the gratuity limit to ₹20 lakh.
- Linking gratuity hikes to DA, with a 25% increase whenever DA exceeds 50%.
Gratuity Hiked in 2024
Effective January 1, 2024, the DA for central government employees rose to 50%, triggering a 25% increase in the gratuity ceiling. This brought the maximum gratuity limit to ₹25 lakh.
In an office memorandum dated May 5, 2024, the DoPPW confirmed:
“The maximum limit of Retirement Gratuity and Death Gratuity under the Central Civil Services (Pension) Rules, 2021, or the Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021, would be increased by 25% i.e., from ₹20.00 lakh to ₹25.00 lakh, with effect from January 1, 2024.”
This enhanced gratuity limit ensures better retirement benefits for central government employees and reflects the government’s commitment to keeping pace with rising costs of living.