Gratuity is a sum of money paid by an employer to an employee upon the completion of a certain period of service. In India, the Payment of Gratuity Act, 1972 outlines the rules and regulations related to the payment of gratuity to employees in the country.
According to the Act, an employee is eligible for gratuity if they have completed at least five years of continuous service with the same employer. The gratuity amount is calculated based on the employee's salary and the number of years of service. The formula for calculating gratuity is:
Gratuity = (15 x last drawn salary x years of service)/26
The last drawn salary refers to the employee's average salary over the last 12 months of their service, and the number of years of service is rounded down to the nearest integer. For example, if an employee has completed 7.5 years of service and their average salary over the last 12 months was Rs. 50,000, their gratuity would be calculated as follows:
Gratuity = (15 x 50,000 x 7)/26 = Rs. 16923
In addition to the above formula, the Act also specifies that the maximum gratuity an employee can receive is Rs. 20 lakhs. This cap was increased from Rs. 10 lakhs in 2010 and is subject to periodic revision.
There are certain situations in which an employee may be eligible for gratuity even if they have not completed five years of continuous service. These include death, disability, or termination of employment due to redundancy, retrenchment, or closure of the establishment.
The Payment of Gratuity Act also outlines the procedures for the payment of gratuity to employees. Employers are required to maintain records of gratuity payments and provide employees with a written statement of the amount of gratuity due to them upon the completion of their service. The Act also requires employers to pay gratuity to employees within 30 days of the employee becoming eligible to receive it.
In conclusion, the Payment of Gratuity Act in India provides a framework for the payment of gratuity to employees upon the completion of a certain period of service or in certain circumstances. The Act ensures that employees are fairly compensated for their years of service and provides clarity on the calculation and payment of gratuity.