Gratuity Calculation Dilemma: Should It Start from Employment Date or Policy Launch?

Hello HR folks,

I have an inquiry regarding the calculation of gratuity for employees who have completed five years of service and are now exiting the company.

As our company introduced the gratuity policy in October 2020, I would like clarification on whether the gratuity calculation for these employees should commence from the inception of their employment or from the implementation date of the gratuity policy in October 2020.

Your guidance on this matter is greatly appreciated, as it will assist in ensuring accurate and fair financial settlements for the departing employees.

Thank you for your attention to this matter.

Hi, in this case, gratuity should be calculated from their date of joining and not from October 2020. Employees who have worked for more than 5 years at the time of their resignation should have their gratuity paid based on their date of joining with the company.

Gratuity Payment Under the Payment of Gratuity Act, 1972

As per Sec. 4 of the Payment of Gratuity Act, 1972, gratuity is payable to an employee on termination of their employment after they have rendered continuous service for not less than 5 years:

a) On their superannuation; or
b) On their retirement or resignation; or
c) On their death or disablement due to accident or disease (in the case of death, the requirement of 5 years of continuous service is not mandatory).

Employer's Insurance Obligation

As per Sec. 4A, every employer has to obtain insurance in the manner prescribed for their liability for payment towards the gratuity under the Act from LIC or any other prescribed insurer.

So, if an employee who leaves the company has completed 5 years of continuous service, they are obviously eligible for the payment of gratuity. It has to be calculated from the date of their joining till the date of separation and not from the date on which the company took the policy. Not taking a policy itself is a violation by the employer under the Act.

Regards,

Hi, The formula for calculating gratuity is Basic / 26 x 15 x No. of years of service. Six months and above should be taken as one year. For example, 5 years 6 months should be taken as 6 years.