Gratuity Act: Employees ALERT! Are you eligible? How amount is calculated? What’s the maximum money limit? Get all answers here

Gratuity is the amount an employee gets when he leaves a company, as a token of appreciation for the services rendered. Gratuity is considered as a token of appreciation for the services provided by the employee. However, an employee must have to fulfill certain conditions to get eligible for gratuity. 

According to the Gratuity Act 1972, an employee becomes eligible for the loyalty benefit only if he has completed five years of regular service. Gratuity Act 1972 says that an ‘Employee’ under the Payment of Gratuity Act means any person employed on wages for doing any type of work, including those hired in the managerial or administrative capacity. The key consideration for gratuity payment is that the person should be employed on wages. Those employed as apprentices are not eligible for gratuity. Gratuity is calculated on the basis of the number of years of service, as it does not include absentee duty and unaccounted leave. If there was a break in your services, then that particular time is also deducted from the payment of gratuity.

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Limit 

The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh. The employer can, however, pay more gratuity than the prescribed ceiling. The payment of gratuity is made either to the employee at the time of his retirement, or termination or to the legal heir in case of death of the employee. 

Calculation 

Gratuity is calculated differently for monthly-rated, piece-rated, and seasonal employees. For employees falling under the Payment of Gratuity Act, gratuity is calculated on the basis of 15 days of the last drawn salary for each completed year of service. If an employee serves over 6 months in a year, then the entire year is counted towards gratuity. In this case, the purpose of calculation allowance other than Basic + Dearness Allowance (DA) is not considered. The basic formula to calculate gratuity for monthly employees is (Basic + DA x15 / 26) x Years of service rendered. 

On the other hand, employee gratuity is calculated taking into account the average of the last three months of service before retirement or termination. For seasonal employees, instead of 15 days, only 7 days are taken into account for calculating gratuity and multiplied by the number of seasons worked over the years. The remaining calculation is the same as the monthly working employee. The basic formula to calculate gratuity is (Basic + DA x7 / 26) x Number of seasons.