Gratuity is a statutory and voluntary benefit provided by an employer to an employee in recognition of their long and continuous service to the organization. It is essentially a monetary reward or financial assistance given to employees as a gesture of gratitude and appreciation for their commitment and tenure with the company.

Here’s how gratuity generally works and the key aspects to consider:

1) Eligibility and Calculation:

– Eligibility Criteria: Employees become eligible for gratuity after completing a specific number of years of continuous service with the employer. This qualifying period is typically five years, although it can vary based on local labor laws or the company’s policies.
– Calculation Formula: The gratuity amount is calculated based on a standard formula specified under applicable labor laws. The formula commonly considers the employee’s last drawn basic salary and the number of years of service completed.

2) Gratuity Formula:

– In many regions, the formula is: (Last drawn monthly salary) x (number of years of service) x 15 / 26
– Here, 15 represents 15 days’ salary for each completed year of service, and 26 represents the number of working days in a month.

3) Payment Conditions:

– Gratuity is typically paid when an employee retires, resigns, or upon their demise or disability (as defined by local laws).
– If an employee resigns or leaves before completing the minimum years of service, they may not be eligible to receive gratuity.

4) Taxation:

Taxation of gratuity varies by country and local tax laws. In many jurisdictions, gratuity is tax-exempt up to a certain limit based on the length of service and the last drawn salary.

5) Funding and Administration:

– Employers may manage gratuity funds internally or opt for group gratuity schemes from insurance companies to fund these liabilities.
– The employer contributes regularly to the gratuity fund based on actuarial calculations, ensuring that funds are available to meet gratuity payouts when employees become eligible.

6) Employer Responsibility and Compliance:

– Employers are legally obligated to provide gratuity as per the labor laws of the country in which they operate.
– Employers must maintain accurate records of employee service and calculate gratuity accurately for eligible employees.

7) Employee Awareness and Communication:

Employers should communicate the gratuity policy to employees, explaining how it is calculated, when it becomes payable, and any additional terms and conditions.

Gratuity is a valuable benefit that provides financial security to employees upon completion of their service tenure. Employers need to understand and comply with local regulations regarding gratuity to ensure fair treatment of employees and maintain legal compliance.