When you join an organisation , you’re asked to share your nominee details documentation, the person who’ll receive your dues if something unexpected happens. This includes benefits like ‘gratuity’, which is a kind of saving earned through both the employee’s and employer’s contribution. It stays with the company and is given when you leave or retire. Let’s understand why gratuity matters and what it really means.

It is a lump-sum amount that an employer gives to an employee as a price of appreciation for their long-term service.

Who is eligible for gratuity?

To be eligible to claim the gratuity, an employee needs to serve at least five years with the organization. It’s generally paid when someone resigns, retires, or leaves the company. In special cases like the employee’s death or a major accident, the amount is given to their family or nominee.

If a employee serves 4 year 11 month in an organization and then resigns from his post in this duration then no gratuity will be given to him.

Gratuity acts as a financial safe cover for the future and is one of the key benefits for loyal and long-term employees.

According to the Payment of Gratuity Act, 1972 gratuity is a financial benefit given by an employer to an employee for long-term, loyal and continuous service.

The maximum amount that can be paid as gratuity is Rs 20 lakh and is tax free under the Income Tax Act.

It is very to calculate your gratuity by your own using these simple steps and formula.

Let’s understand this with an example, suppose you have worked 7 years in an organization and your last salary was Rs 70,000 (including basic pay and allowances).

Your gratuity will be calculated using this formula:

Gratuity= (Last drawn salary) × (15/26) × (Number of years of service)

Applying the example in this formula:

Rs 70,000 × (15/26) × 7 = Rs 2,82,692

This means you would receive Rs 2,82,692 as your gratuity payment.

Apart from earning a gratuity from your organisation, you earn several benefits which are mentioned below:

• It gives you financial security by providing a good amount of money in your bank account at the end of your service. This helps the employees to manage their post-retirement expenses.
• It is a reward for the loyalty to organisation you served, its a way to appreciate long-term employees who stayed more than five years and served with sincerity.
• A gratuity earned up to Rs 20 lakh, makes it a tax-efficient form of income. In case of mis happenings like employee’s death, serious injury, any severe illness then the gratuity is paid to the nominee, this offers financial relief to employee’s family.
• As, the gratuity starts after five years, it motivates the employee to stay longer with the company.
• The amount helps employees build a financial buffer for their retirement years, ensuring peace of mind and stability.