Gratuity is a lump-sum financial benefit paid by an employer to an employee as a token of appreciation for long-term service. In India, it is governed by the Payment of Gratuity Act, 1972, and is given when an employee retires, resigns, or leaves the company after completing a minimum period of service.
In simple words, gratuity is a reward for long-term service to the employer.
Example for a Bank Employee
Suppose a bank employee completes the required period of service and retires from the bank. At the time of retirement, the bank may pay the employee a gratuity amount in addition to other retirement benefits such as pension, provident fund, etc.
How is Gratuity Calculated?
For employees covered by the standard gratuity formula, gratuity is generally calculated as:
Gratuity = Last Drawn Salary × 15/26 × Completed Years of Service
For example, if the salary considered for gratuity is ₹1,00,000 and the employee has completed 20 years:
₹1,00,000 × 15/26 × 20 = approximately ₹11.54 lakh
However, bank employees can have gratuity terms under their applicable settlements/service agreements, which may provide benefits more favourable than the statutory minimum.
Eligibility Rules
- Minimum Service: Generally requires 5 years of continuous service with the same organization.
- Exceptions: The 5-year rule does not apply in cases of death or disablement, where payout is immediate.
- Employer Funded: The entire amount is paid by the employer; no money is deducted from your monthly salary
