What is gratuity and how is it calculated & difference between Gratuity and Provident Fund?

 

The central government is considering a change in the rules of gratuity payment for employees. Under this, the government is considering reducing the time limit of gratuity payment for employees from 5 years to between 1 and 3 years. Gratuity is the amount paid to an employee on behalf of the organization or employer where he was working. But for this, he needs to work there for at least five years. Usually, this amount is paid when an employee leaves the job, is removed from the job or retires.

 

Gratuity can be received before 5 years in case of death of the employee, in addition to the death of the employee due to any reason or in case he leaves his job due to illness or accident, he or his nominee gets the amount of gratuity. According to the rules of the Gratuity Payment Act 1972, the amount of gratuity can be up to a maximum of Rs 20 lakhs.

 

Gratuity Payment Act 1972 The 'Gratuity Payment Act' was enacted in the year 1972 to protect the interests of employees. Under this law, employees of all those entities working in all other sectors, such as mining areas, factories, oil fields, forest areas, companies and ports, where 10 or more employees are employed. Gratuity and provident are completely different. In gratuity, the entire money is paid by the employer, while in the provisional portion a portion is also taken from the employee.

 

Which institutions come under the Act? Any organization where 10 or more employees have worked on any one day during the last 12 months are covered under the Gratuity Payment Act 1972. Once it comes under the purview of the Act, the organization remains under the ambit of the Act forever, even if later the number of employees falls below 10.

 

Under this, 2 categories of employees are divided into two categories to decide the formula for the amount of gratuity received by employees under the Gratuity Payment Act 1972. The first category consists of the employees who come under the purview of this act, while in the second category the employees outside the act come. Both employees working in private and government sectors are covered in these two categories. Under the second, the employer (company) who does not come under the ambit of the Gratuity Act, can also give the benefit of gratuity to his employer.

 

How is gratuity calculated? Category 1- Those employees who are covered under the Gratuity Payment Act 1972. Category 2 - Employees who are not covered by the Gratuity Payment Act 1972.

How is gratuity calculated? Formula for calculating gratuity for category 1: (15 x previous salary x working period) / 26

• The last salary = basic salary + dearness allowance + commission on sales (if any). In this formula, an employee is paid an average of 15 days, assuming 26 working days a month.

 

• Duration of job = In the last year of the job, if he works above 6 months, he will be considered as a full year, like 5 years and 7 months, he will be considered as 6 years in case of working.

 

• Example: After leaving the job for 5 years 8 months in ABC Limited, Mr XYZ leaves the job. During the last month of leaving the job, his basic salary was Rs. 13000 per month. In this case, according to the formula, his gratuity amount will come out in this way.

 

• How much gratuity will be received: 13000x6x15 / 26 = 45,000 rupees

The formula for calculating gratuity for category 2: (15 x previous salary x working period) / 30

• Duration of Job = For such employees, a period of not less than 12 months is added to the last year of the job. For example, if the employee has worked for 5 years and 7 months, then it will be considered as 5 years only.

• Example- Mr XYZ leaves job after working for 5 years 8 months in ABC Limited Company. His basic salary during the last month of leaving the job was Rs 13000 per month. This company does not come under the purview of the Act, in such a situation, according to the formula, the amount of Mr XYZ's gratuity will come out like this.

• How much gratuity will be received: 13000x5x15 / 30 = 32,500 rupees

• Gratuity in the event of the death of the employee In case of death of the employee, gratuity is paid on the basis of the duration of the job, where a maximum amount of up to Rs 20 lakh can be paid.

Term of Employment	Gratuity
Less than 1 year	Double the basic salary
More than 1 year but less than 5 years	6 times the basic salary
More than 5 years but less than 11 years	12 times the basic salary
Over 11 years but under 20 years	20 times the basic salary
Jobs over 20 years	Half of the basic salary for every six months job. (Not to exceed 33 times of emoluments)

Note: emoluments mean salary, grade pay, military service pay NPA in pay band (If due) and dearness allowance payable at the last.