Confused About Service Compensation vs. Gratuity: Why Stay Beyond 5 Years?

Dear Sir(s),

I am a little confused and seek your help. I am confused about "Service compensation." The Shops Act states that any employee who has completed more than one year of service is eligible for service compensation of 15 days of wages per year worked.

My confusion lies in the similarity to Gratuity, which is an entitlement subject to the completion of 5 years of service. What then incentivizes an employee to continue serving beyond 5 years in a company when they receive a similar benefit even if they leave before completing 5 years?

I look forward to an early reply.

Thanks, Shradha

Gratuity is over and above service compensation or any other such allowances/compensations. So you can receive the service compensation every year and receive gratuity at the end of five years.

Dear Mr. Mirza,

Thank you very much for showing interest in my query. So, it is certain that the employer needs to pay service compensation at 15 days' wages per year worked if the employee leaves the company before completing 5 years. Could you please confirm if my understanding is correct?

Thanks once again,
Shradha

Hi,

Please note that gratuity is paid upon completion of 5 years of service, whereas the service incentive you are referring to will depend on the company's decision to implement it. However, gratuity is mandatory for employees, even if they leave after completing just 1 day after reaching the 5-year mark. To clarify, if an employee completes 5 years on 12.09.05 and leaves the organization on 13.09.05, the company is obligated to pay the gratuity.

As you are aware, for each year of service rendered, the gratuity amount is calculated as half a month's salary (basic) divided by 26 days in a month (please note that Sundays are not included). For further verification, please refer to The Payment of Gratuity Act 1972. Wishing you the best and hoping that this explanation clears up any confusion.

Regards,
Sadashiv Rao 8)

Hi,

I have recently joined this forum and seek clarification on Gratuity. The act states that gratuity is payable to employees upon completion of 5 years of service, and there is a formula for its calculation.

I would like to know if it is mandatory for companies to pay gratuity to employees, even if it is not mentioned in the appointment/offer letters and the company is not making any deductions towards gratuity (my company is entering its fifth year of operation). Or is this act flexible based on the company's internal policy?

I would appreciate your prompt responses.

Regards,
Nidhi

Hi Nidhi,

Gratuity is mandatory. This is a benefit additional to the salary. So, you will have to pay gratuity as per the Gratuity Act, irrespective of whether you mentioned it in the Appointment letter or not. It is a retirement benefit.

Dr. Thomaskutty

Hi Nidhi,

This is pertaining to your query on the Gratuity benefit. Please note the following points:

a) Gratuity is to be paid to the employee (mandatory) on completion of 5 years of service (when they are leaving the organization after 5 years).

b) Since you mentioned that your company is in its 5th year, naturally employees who have been there from day 1 will automatically complete 5 years of service.

c) In the calculation of Gratuity, only 26 days are considered (excluding Sundays).

d) The calculation will be half-month basic pay divided by 26 days multiplied by the number of years of service (divided by 365 days).

I hope this information will help you with your query. For more details, you can also refer to THE PAYMENT OF GRATUITY ACT 1972.

All the very best to you.

Best Regards, Sadashiv Rao :)

Hello All,

I don't think that "service compensation" is applicable in India because in India, we have the Payment of Gratuity Act enforced. If I'm wrong, please clarify.

Amit Goyal