Gratuity Eligibility Before and After Completion of 5 Years

What is Gratuity?

Gratuity is a sum of money paid by an employer to an employee in recognition of their long service and contribution to the company. It is a one-time payment, typically made when the employee retires, resigns after completing five years of service, becomes disabled, or dies.

The gratuity amount depends on one employee to another employee. It is generally a part of an employee’s salary and is paid at the time an employee leaves to job after serving the organization for a minimum of 5 years. Gratuity is designed in such a way that it aids an employee at the time of his/her retirement.

What is Eligibility Criteria for Gratuity?

To receive the gratuity amount, an employee needs to be eligible for the following criteria:

• The employee needs to be eligible for the organizational pension program or superannuation

• The employee should have worked with the company for at least 5 years

• 5 years should be in continuation without any gaps

• The employee needs to retire

• The employee is eligible if he/she passes away untimely or suffers disability due to an accident, or critical illness

Can an Employee Receive Gratuity Before 5 Years?

Employees who leave an organization after approximately 4 or 4.5 years often inquire about their eligibility for gratuity. While the government is making revisions to the plan, presently, the sole requirement for gratuity is the successful completion of 5 years of service with the organization.

Thus, is it possible for an employee to receive gratuity before completing 5 years? The response is NO. An individual must fulfill five uninterrupted years of service with the company (without any breaks) to claim gratuity at the end of his employment term with the organization.

Conditions Governing 5 Years of Continuous Service

The conditions governing 5 years of continuous service for gratuity are as follows:

• The employee must have been employed for a period of not less than 5 years.

• The employment must have been continuous. This means that breaks in service of less than 3 months will be ignored.

• The employee must have been employed by the same employer for the entire period of 5 years.

What are the Recent Updates in the Gratuity Act?

The recent updates in the Gratuity Act are: 

• New rules aim to protect contract workers with specific contracts, introducing Social Security provisions and eligibility for gratuity.

• Chapter 5 has modified the minimum tenure for journalists, reducing it from 5 to 3 years for those wishing to resign.

• Family members of other professionals can claim gratuity before 5 years if the person is deceased.

• Clauses requiring consecutive 5 years of service are waived in cases of severe employee illness.

• Allowances for recruits are capped at 50% of their salary.

• These changes aim to enhance gratuity for senior staff with over 5 years of service.

• New rules exclude PF contributions, conveyance allowances, bonuses, and overtime payments from an individual's salary.

• The salary structure undergoes a complete reorganization.

• The law considers the notice period when calculating the maturation time for gratuity.

• The notice period falls in the last working month and is eligible for salary.

• Gratuity is calculated based on the entire tenure from the date of joining to the last active working day, including the notice period.

What is the Gratuity Formula?

Calculation of gratuity is very simple and hassle-free, with very few complications.

Gratuity formula:

Gratuity = N * B * 15 / 26, where

N = number of years completed in the company, and

B = last withdrawn basic salary (dearness allowance in addition)

How is Gratuity Calculated?

Let us understand the calculation with a simple example:

For instance, Mr. X worked with XYZ Private Limited for 25 years and earned a basic salary + dearness allowance of  Rs. 40,000 per month. The calculated gratuity will be as follows:

25 X 40,000 X 15 / 26

= Rs. 5,76,923/-

Important:

Gratuity amounts vary between employers and are based on basic salary + DA. Every 6 months counts as a year only after 5 years of service. For example, 7.6 years would round up to 8 years, while 7.4 years would round down to 7 years for gratuity payment.

Final Words!

Gratuity is the right of every employee, even if the employer goes bankrupt. No court can deny the gratuity payable to the employee if he/she falls under the eligibility criteria for the same.

Gratuity is a good option to create a decent corpus for the future of any individual, and all the employees should try and take the gratuity from the organization they have given their time and sweat for.