What is Gratuity? Meaning, Eligibility, and Calculation

Gratuity Meaning

Gratuity meaning is a monetary benefit provided by an employer to an employee in case the employee serves the organization for more than 5 years. Most employees receive this benefit on their resignation or retirement from the organization. In India, the Payment of Gratuity Act, of 1972, regulates a justified allocation of gratuity payments to employees in both the private and public sectors. This act by the government ensures that there is an on-time payment of gratuity to workers, irrespective of the reason behind their exit from the company or retirement cases. In the answer to what is gratuity, the eligibility for enjoying gratuity benefits matters more. Let’s move to that.

Gratuity Eligibility Criteria

We have already discussed gratuity meaning, now let’s head to understand its eligibility. There are few rules that determine if an employee and the employer are both eligible for gratuity payment.

Minimum Employment Period

For becoming eligible for receiving gratuity, an employee needs to be employed within the same organization for a minimum period of five years. These five years are vital according to the Payments of Gratuity Act, 1972.

Types of Employment

The gratuity act is applicable to a range of sectors across various industries. Both permanent and contract employees are eligible for receiving a gratuity only after they are eligible for superannuation and have served a minimum of 5 years in the same firm.

Organizational Requirement

A strict gratuity eligibility criteria is that the organization has a minimum of 10 working employees. For startups and SMEs also, the same rule applies. Organizations that have less than 10 employees, cannot apply for gratuity benefits as per the Payments of Gratuity Act.

Applicable For Organized And Formal Workers

Gratuity is not applicable for those workers who are working as freelancers or gig workers. The law does not provide any mandatory payment to any gig workers, hence only organizations that employ workers formally are eligible to provide gratuity benefits.

Exceptions to Eligibility

Another gratuity eligibility criteria is the employee cannot be terminated due to serious misconduct or employee dishonesty grounds. In such cases, they may not be eligible for receiving gratuity benefits. Also, if any employee is terminated on grounds of allegations such as theft or have a history of criminal offence, may not be eligible too.

Eligibility For Superannuation

The employee has to be eligible for superannuation to apply for gratuity. A firm is abided by law to provide for superannuation benefits once it has more than 10 employees employed. Gratuity is a part of superannuation benefits, so to be eligible for it, requires the employee to be eligible for superannuation and other retirement benefits.

How to Calculate Gratuity Amount?

Calculating gratuity is easier than thought of now. You can use Covrzy Gratuity Calculator and get an accurate breakdown of your gratuity information within seconds.

Gratuity Formula

Glossary of terms

These are the meanings of a few terms used in the formula:

Last drawn salary: An employee’s last drawn salary consists of the basic salary, dearness allowance (DA), and any allowance such as housing or internet allowance. Other allowances might or might not be included depending on the individual employment agreement.

Total number of years of employment: Years of service refers to the total number of continuous years the employee has served in the organization. This is calculated based on the contact length with the company and the number of years the employee has served without taking a career break.

Example

Anuj had worked in a firm for eight years, and recently he has applied for a voluntary exit from his position in the company. Here are his salary details:

Using the Covrzy Gratuity Calculator, we can find what is a gratuity amount of Anuj after 8 years. It comes to: ₹1,93,846

This gratuity applicability is calculated based on Anuj's net salary which is adjusted for tax and all other allowances he has received.

Gratuity Payment In Case of Employee Death

In the case an employee passes away, gratuity is provided to the nominee of the employee. But if the employee has passed away before completing the stipulated period of 5 years, gratuity is still payable provided that the employee could not continue employment due to death or any accident. Section 4 of the Payment of Gratuity Act, 1972 details that gratuity is payable to anyone who has discontinued employment because of expiry or termination due to accident or disease.

Gratuity Applicability for Various Industries

Gratuity meaning is a lump sum payment paid to an employee who has served a continuous of 5 years in an organization. This payment is mandated by the Payment of Gratuity Act, 1972 to every employee who meets the eligibility criteria, from any industry. Both employees and employers need to be aware of the types of industries and areas covered by the Gratuity Act, so let’s get forward to it.

Industry covered

These are some major industries that pay their employees gratuity.

Information Technology (IT)

In India, the IT industry is one of the most famed as almost 51 lakh individuals are employed in the IT sector as reported by the Ministry of Electronics and IT in 2022. Most of the companies that are bound with IT-based services such as database management, data forensics, cybersecurity, and IT consultation firms comply with the Payment of Gratuity Act.

Manufacturing Industry

The manufacturing industry is another flourishing industry in India. It is an all-encompassing industry that covers several other industries such as textiles, working on automobiles, consumer goods, and electronics. Because the manufacturing industry is mostly based on labor work and blue-collar workers, gratuity payment is followed in this industry.

Healthcare

Government and private hospitals provide a fixed gratuity to all the doctors and healthcare workers who serve employment for a total of 5 years. Healthcare professionals such as doctors, hospital staff, and nurses are all entitled to receive the benefit of gratuity when they complete 5 years of continuous service. The reason for allowing gratuity in healthcare is to motivate the workers as they are at the forefront of maintaining public health balance.

Know the meaning and importance of OPD in health insurance.

Retail Industry

India is home to millions of retail stores. In 2024, 750 new retail stores had come up and the number of retail stores had duly expanded from small stores to chain stores. Employees in retail shops are hence treated as full-time workers and are entitled to gratuity. A which can act as a source of economic security while moving from one job to another or during retirement.

Hospitality Industry

Gratuity applicability is also present in restaurants and the hospitality sector. In the hospitality industry, all the working staff such as chefs, waiters, and management workers can avail the benefits of gratuity payments for their efforts and commitment. Moreover, for any NGOs that are closely related to the hospitality sector, payment of gratuity is mandatory as per the law.

Construction Industry

Construction workers, who comprise a major percentage of both laborers and skilled personnel, fall under the ambit of the Act as well. Construction workers are eligible to receive gratuity benefits, something that can prove highly significant since construction work often proves to be transitory.

Exceptions and Special Considerations

Although gratuity law applies to a range of industries, it still does not apply to a few specific cases.

Government Employees

Government employees who have left the service or resigned after 5 years, can claim gratuity benefits. The amount of gratuity increased from ₹20 lakhs to ₹25 lakhs for all government employees, from January 1st, 2024. However, the government employee is not entitled to receive a pension in case they leave the service after completing 5 years, although they are entitled to a gratuity.

Small Businesses

The Act does not apply to businesses with fewer than ten employees. This could mean that small businesses, especially in industries such as retail or services, will not be obliged to offer gratuity benefits, which could result in employees of these businesses not having this safety net of finance.

Specific Industries

In the case of the agriculture industry, the act of gratuity is not applicable for 5 years. If a worker does not serve a minimum of 10 years in the National Bank, they cannot claim gratuity benefits according to the Payment of Gratuity to Employees Rules, 1983.

Is Gratuity Taxable in India?

The first question that you may ask as a business owner, is gratuity taxable. The answer is a bit complex. Gratuity is exempted to a certain extent, let’s review the terms of exemption. The least amount of this is exempted from tax for:

Employees covered under The Payment of Gratuity Act:

• Last salary including DA * total number of years world * 15/26
• ₹20 lakhs exempted from taxation
• Actual gratuity received

Employees covered under The Payment of Gratuity Act:

• Last 10 month’s salary in average figure
• ₹20 lakhs exempted from taxation
• Actual gratuity received

Moreover, employees working in the government sector are completely exempted from paying any tax on gratuity claims. This applies to all the employees working in the Central Government sector, under the State Government, or even serving in government healthcare facilities and courts of law.

How to Check Gratuity Amount Online?

There are several online resources and tools that you can use to calculate your employees' gratuity amount. Here are some shortcut steps on how to check the amount online.

• Head over to an online gratuity calculator
• Input the gross salary including the DA and other allowances
• Click calculate option
• You will get the actual figure of gratuity without getting to calculate with the formula. However, to get the actual figure of gratuity, you may need to know the actual salary adjusted for tax and allowance. You can get this directly by accessing the salary slip or knowing the actual amount of allowances that you are contributing for PF, DA, and ESI.

Conclusion

Gratuity is a type of economic security for employees, as it provides them with a lump sum that can be quite resourceful during their retirement or a transition to a new job. It is an indication of the employer's gratitude for the worker's years of commitment and service. Yet, many employees are still not aware of their gratuity rights and may lose claiming the benefits of gratuity upon service of at least 5 years. For both the employer and employee, the knowledge of gratuity is highly significant. This blog goes into detail about the eligibility conditions and the procedure for calculating gratuity and taxability.

Get Your Group Gratuity Insurance In an Affordable Package

The Government of Karnataka has mandated taking up gratuity insurance for all the firms located and operating within Karnataka. If you’re still confused about purchasing an affordable gratuity plan for your employees, check in with Covrzy. Covrzy brings a team of experienced advisors who are always here to aid you in buying the right gratuity plan for your business, without undergoing the hassles and rigorous paperwork.