What is Gratuity ?
Gratuity is a monetary benefit paid by an employer to an employee as a token of appreciation for their service to the organization. It is a statutory benefit in many countries, including India, and is governed by laws that specify eligibility, calculation, and payment processes. Gratuity serves as a financial security measure for employees, especially upon retirement, resignation, or in specific situations such as disability or death.
Key Features of Gratuity:
Eligibility:
Employees who have completed a minimum of 5 years of continuous service with an employer are typically eligible for gratuity.
Exceptions to the 5-year rule include cases of death or disability, where gratuity is paid irrespective of the length of service.
Applicability:
Gratuity applies to establishments that employ a minimum number of employees (e.g., 10 or more in India under the Payment of Gratuity Act, 1972).
Payment Scenarios:
Gratuity is paid when an employee retires, resigns, or is terminated after meeting the eligibility criteria.
It is also paid to the nominee or legal heir in the event of the employee’s death.
Calculation of Gratuity:
The gratuity amount is calculated using the following formula (common in India):
Gratuity = (Last Drawn Salary) × 15 × (Years of Service) ÷ 26
Last Drawn Salary: Includes basic salary and dearness allowance (DA).
15 Days: Represents half a month’s salary for every year of service.
26: Refers to the number of working days in a month.
Taxation on Gratuity:
Tax-Exempt: Gratuity received by government employees is fully tax-exempt.
Non-Government Employees: Gratuity is tax-exempt up to a specified limit under the Income Tax Act. Any amount exceeding this limit is taxable.
Importance of Gratuity:
Employee Loyalty:
Encourages employees to stay longer with an organization.
Retirement Security:
Provides financial stability to employees post-retirement.
Legal Obligation:
Ensures employers recognize and reward employees’ contributions.
Challenges and Considerations:
Continuous service requirement:
Employees who leave before completing 5 years may not receive gratuity, which can be perceived as a disadvantage.
Employer Liability:
Employers need to manage funds to meet gratuity obligations.
Awareness:
Employees may not fully understand their gratuity rights, leading to disputes.
Gratuity as a Part of Employee Benefits:
Gratuity is a significant component of employee welfare programs, ensuring long-term benefits for employees while fostering a positive employer-employee relationship.