Understanding Gratuity: How Is It Calculated and When Does It Apply?

Hi, Friends and Sir,

Please tell me:

1. What is the rate of contribution for the calculation of gratuity?
2. Where does the employer deposit the contribution? Is it deposited monthly, half-yearly, yearly, or only once?
3. If an employer completes 5 years of incorporation, is it compulsory for the act to apply or not?

Dear Shahzada,

Following are your answers:

1) What is the rate of contribution for the calculation of gratuity?
The rate for the gratuity will be:
Gratuity = (Basic + DA (at the time of leaving)) / 26 x Number of years of service x 15.
For example, if 'A' employee's basic is Rs. 5000.00, DA is 500.00, and the number of years of service is 6 years, then his gratuity amount will be:
Gratuity = (5000 + 500) / 26 x 6 x 15.
Fifteen days is the number of days' wages to be paid for every completed continuous year of service.

2) Here, the employer deposits the contribution either monthly, half-yearly, yearly, or as a one-time payment.
The employer takes out a group gratuity policy for employees and pays the annual premium for the gratuity.

3) If an employer completes 5 years of incorporation, is it compulsory for the act to apply or not?
If an employee completes 5 years of service, the act applies.

I hope the answers solve your queries.

Thanks,
Amit

Dear Amit,

Thank you for the information. Please clarify if an employee completes 5 years, 5 months, and 15 days (for example), should it be rounded off to the nearest whole number, i.e., 5 years only? Furthermore, if they complete 5 years and 7 months, should it be treated as 6 years (rounded off to the nearest whole digit)?

Please clarify.

Regards,
Gururaj.

Dear Gururaj,

If an employee completes 240 days of service in any year, it should be counted as a full year. For example, if an employee has completed 4 years and 241 days of continuous service, they are eligible for the gratuity of a total of 5 years. The same calculation should be applied for subsequent completed years of service.

Hope this is clear.

Thanks,
Amit

Dear Amit,

Thank you very much for sharing this knowledge. Actually, I was under the impression that if an employee has completed more than 6 months of continuous service, the same should be rounded off to the next higher digit, i.e., 1 year. Now it is clear to me. Thanks for clarifying my doubt.

Further in your earlier post, in response to a new joinee as an HR manager, you have explained about immediate roles and responsibilities for a new HR manager. If you could kindly recall, many members have requested you to forward them HR MIS. Can you kindly send the same to me also @ guru1967@gmail.com? (If you already sent the same to me, please ignore this request.)

Regards,
Gururaj.

Dear Amit,

What happens in the case where an employee has served an organization for, let's say, 10 years and leaves, then joins another organization but after two years rejoins his earlier organization and works for close to 4.5 years before leaving again? In this case, will his service be counted as 14.5 years in total, or as 10 years separate from the initial tenure and 4.5 years separate for the second stint?

Is he eligible for gratuity during his second stint?

Regards,
Anup

Dear Anup,

An employee has left the service and is now rejoining the organization, which means he is considered a new employee. Therefore, for the second time, new rules of gratuity will be applicable to him. For 4.5 years of service, he will not be eligible for gratuity the second time.

Hope this is clear.

Thanks,
Amit

Dear Shahazada,

Your first question is confusing. Are you asking for the contribution or are you asking for the calculation of gratuity? If it is a calculation, then Amit's reply is okay.

Regards,
Jaychandran

Dear Amit,

Indeed, your information on gratuity was really informative. I am currently teaching labor laws. May I seek your guidance in the future?

Regards,
Shikha