When an employee has worked for a longer period of time with the organization, the organization is entitled to pay a lump sum amount to the employee in the form of gratuity. This sum is given to the employee for his loyal service towards the company and as a reward for their long service. Earlier, such cases of exchange between the employee and employer often presented several disputes and challenges. In order to resolve this, the Indian government passed the bill, the Payment of Gratuity Act 1972.
The bill nationalized the process of rewarding a loyal employee who has been working with the company for a longer period of time. This bill was passed with an intention to financially help the employees who are retired or are about to retire.
Eligibility for Gratuity
As per the Payment of Gratuity Act 1972, an employer is eligible to give gratuity rewards to its employees when the workforce of the company has reached to 10 in any year. Once the company has reached the mark they are covered under the act. The company will remain covered under the Act and still will be entitled to pay gratuity to its employees even when the number of employees reduces after hitting the mark.
An employee is eligible to claim his gratuity reward if he has successfully fulfilled five years of his service with the same company. The gratuity reward can be given to the employee at the time of retirement, termination, superannuation.
In an unfortunate event of total disablement or death of an employee, the nominee or heir can claim the gratuity reward. In such cases, irrespective of the years of service of the employee, the company will have to pay the gratuity sum as suggested by the bill.
How is the amount of gratuity calculated?
There is no specified percentage or amount that shall be given to the employee as a reward, but the government has specified a ceiling amount of 20,00,00. Which means that an employer can reward up to Rs. 20,00,000. The gratuity amount of more than 20 Lakhs is taxable.
In order to calculate the gratuity amount, the Indian government has specified a formula-based approach. The formula to calculate the reward is:
Gratuity = 15/26 [last drawn salary* no of years of service]
Here the gratuity is calculated at the rate of salary 15 days a month, while there are 26 working days in the month.
Often employees are confused if they are eligible to receive the gratuity amount or not because of the calculation. As per the bill, for the employees working below the ground, 194 working days will be considered as one complete year of service. While for the employees working above the ground, 240 working days out of a total of 365 days will be calculated as one complete year of service.
Let’s understand how this calculation of complete one year is done by taking up a certain example.
An employee A has worked for 4 years and seven months with a company is he eligible for gratuity reward?
No, employee A is not eligible for gratuity reward as he has worked with the company for four years and seven months. Now if calculated seven months will account to nearly 180-200 working days. While 240 working days are counted as one complete year.
Employee B has been working with the company for 4 years and 255 days. Where the company had five working days a week.
As per the bill, 240 working days out of 365 days are counted as one year, and employee B has been working with the company for four years and 255 days so clearly employee B is eligible for the gratuity reward.
Another employee C has worked with a company for 4 years and 8 months where the number of working days were five days a week. Is he eligible for the gratuity?
Employee C has completed four years in the company but in the fifth year, he has worked for eight months where the number of working days was 5. So the total number of days worked in the fifth year will be (5*4*8) which is equal to 160. And so Employee C is not eligible for the gratuity.
Often disputes occur between the company and the employee on the eligibility for the rewards. Sometimes after detailed discussions, if it is cleared that employee is eligible, then he is paid the gratuity. And sometimes an employee is not eligible to claim for the reward.
This is why it is suggested for the employees who are planning to retire or resign from their current company, read all the rules and regulations properly and then claim for the rewards. For the employees who have reached the age of retirement or the employees that are planning to retire it is suggested that they invest their parked money in a safe investment scheme like Fixed Deposits. By investing in Fixed Deposits with companies like Bajaj Finance, you can also get additional benefits such as higher interest rates and flexible tenors.