Gratuity is given by the employer to his/her employee for the services rendered by him during the period of employment.
Gratuity is a lump sum payment made by an employer to an employee as a form of appreciation for the employee's long and meritorious service upon their retirement or resignation. It is a form of retirement benefit that is paid to employees who have completed a minimum number of years of service with an organization, typically five years or more.
Gratuity is usually calculated as a percentage of the employee's basic salary and is governed by the Gratuity Act of 1972 in India. The Act specifies that an employee who has completed at least five years of continuous service with an organization is entitled to receive gratuity upon termination of employment due to retirement, resignation, death, or disability.
The amount of gratuity payable is calculated as follows:
Gratuity = (Basic salary + Dearness allowance) x 15/26 x Number of years of service
Here, the number of years of service is rounded off to the nearest full year. For example, if an employee has worked for 15 years and 6 months, the number of years of service would be rounded off to 16 years.
It is important to note that gratuity is a statutory benefit, and employers are legally obligated to pay gratuity to their employees. Failure to do so can result in legal action against the employer.