WHAT IS GRATUITY

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UNDERSTANDING GRATUITY

       Gratuity is given by the employer to his employee for the service rendered by the employee during the period of employment. It is normally paid at the retirement time but it can be paid earlier in case of demise of the employee.
       A person is eligible to get gratuity only if he has completed minimum 5 years of service with an organisation. However gratuity can be paid before the completion of five years in case of death of the employee or if has become disabled due to accident or disease.
     Payment of gratuity depends on two factors ie last drawn salary and years of service rendered. Payment of Gratuity Act,1972 has divided non- government employee into two categories.

1.  Employee covered under this Act
2.  Employee not covered under the Act

   An employee will be covered under the act if in an organisation number of employee at least 10 person on a single day in preceding 12 months. Once an organisation comes under the purview of the gratuity act,then it will always remain covered even if the number of employee is falls below 10.

CALCULATION OF THE GRATUITY

 1. FOR EMPLOYEE COVERED UNDER THE ACT    

        There is a formula to calculate the gratuity. The formula is based on the 15 days of last drawn salary for each completed year of the service or part of thereof in excess of six months. The formula is as follows -

Gratuity=

  15 x Last drawn salary x tenure of service
     ------------------------------------------------------------------------------
                 26
  Last drawn salary includes basic salary,dearness allowance and commission received on sales.

It can be understand with the example--
Shyam retires after the service of 24 years and 8 month. His last drawn salary was 50,000 per month. How much gratuity he will get at the time of retirement.

 Solution--     Last drawn salary = 50,000
                       Tenure of service is 25 years ( here he has rendered 24 years and 8 month of service which is more than the six month so 8 month will be count as one year)

     So putting the values in formula =    15 x 50,000 x25
                                                                       ----------------------
                                                                             26
                                                                 =   721153.84
                                                                 

2.  FOR EMPLOYEE NOT COVERED UNDER THE ACT

     There is no law that binds an employer from paying gratuity to his employee even if the organisation is not covered under the Act. The amount of gratuity payable to the employee can be calculated based on half month salary for each completed year. Here service must be completed in a years if anyone has worked for 24 year and 8 month so no of years will be count 24 years for the calculation of gratuity.

    In this case the formula will be=   
      
      Gratuity =   15 x last drawn salary x tenure of service
                           ---------------------------------------------------
                                            30

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