Gratuity
Table of Contents
The gratuity is a statutory compensation granted by the employer to the employee as a monetary expression of gratitude for the valuable services that he has rendered to the company for a particular period of time.
Payment of gratuity in India is governed by the Payment of Gratuity Act of 1972. The Gratuity Act is applicable to factories, mines, oilfields, plantations, ports, railway companies, shops and establishments employing ten or more workers. The act was introduced in order to safeguard the interests of employees after retirement or leaving their occupation.
When does an employee become eligible for gratuity?
As per the provisions of the Gratuity Payment Act, gratuity will be paid out when the service of the employee terminates after completing five years of uninterrupted service. The termination of service can take place when the employee resigns, retires or is terminated.
If employment is terminated because of the death or disability of the worker, then there is no mandatory five-year service period required for payment of gratuity.
How gratuity is calculated
For most monthly-rated employees covered under the Act, gratuity is calculated at the rate of 15 days wages for every completed year of service or part of a year exceeding six months. The commonly used formula is:
Gratuity = Last drawn wages × 15 × completed years of service ÷ 26
Here, “last drawn wages” generally includes basic wages and dearness allowance, where applicable. The Act explains that for monthly-rated employees, 15 days’ wages are calculated by dividing the monthly wage by 26 and multiplying it by 15.
Gratuity in payroll and exit processing
For Human Resource and Payroll departments, Gratuity is closely related to employee seniority, last drawn salary, exit cause, salary structure and final settlement. An incorrect calculation of gratuity may arise in case of incorrectness in service dates, salary elements or the exit cause itself.
The concept of gratuity should not be considered as an element of FnF that comes under casual treatment. It has its unique requirements, criteria, formula and time frame for the payment. The employer is supposed to make the payment within thirty days as per the Act.
For corporate organizations, there is a need for clearer collaboration in terms of payroll processing for gratuities, which is especially vital when firms are dealing with several office locations, employee classifications and remuneration packages.
Key takeaway
Gratuity forms part of the critical employee benefits package that helps with the financial security of employees after serving a company for many years. HR and Payroll personnel need to be very meticulous in how they manage the processing of the payment of gratuity, based on various factors, such as accurate record keeping and proper calculations.
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