Gratuity is a financial benefit given by an employer to an employee as a token of appreciation for long-term service. It is paid when an employee resigns, retires, or is terminated after completing a minimum of five years of continuous employment with the same organization. In India, gratuity is governed by the Payment of Gratuity Act, 1972.

In simple terms, gratuity serves as a reward for employee loyalty and long-term contribution to the organization. It acts as a form of social security, providing financial stability to employees upon leaving employment or retiring.

Formula to Calculate Gratuity:

Gratuity = (15 ? Last Drawn Salary ? Years of Service) ˜ 26

Here, ìsalaryî includes basic pay and dearness allowance, while 26 represents the number of working days in a month. For example, if an employeeís last drawn salary is ?50,000 and they have completed 10 years of service, the gratuity amount would be (15 ? 50,000 ? 10) ˜ 26 = ?2,88,462.

Key Features of Gratuity:

• Eligibility: Employees must complete at least five years of continuous service to be eligible for gratuity, except in cases of death or disability.
• Tax Benefits: Gratuity received by employees covered under the Act is tax-free up to ?20 lakh, subject to conditions under the Income Tax Act.
• Employer Obligation: Employers are legally required to pay gratuity within 30 days of it becoming due.

Gratuity not only strengthens employee retention but also promotes a sense of financial security. It reflects an organizationís commitment to employee welfare, ensuring that workers are rewarded for their loyalty and service over time.

In conclusion, gratuity is an essential part of employee compensation in India. By recognizing long-term service, it fosters trust between employers and employees while providing vital post-employment financial support.