Understanding Gratuity Eligibility and Calculations in India

Are you eligible to receive gratuity from your employer if you leave the company for greener pastures before five years? Also, what’s the importance of this five-year rule? These are the questions that we’ll look to answer in this article.

What is Gratuity?

Gratuity is a statutory benefit for all employees providing continuous service to any employer for a particular duration. This amount is mostly paid as a lump sum at the time of retirement or in other scenarios like the demise of the employee, resignation from service, and even termination of employment. Now that the basic concept’s out of the way, let us take a look at how gratuity is calculated and whether you’re eligible to get it before 5 years.

How Can You Calculate Gratuity?

Before we move onto whether you can get your gratuity from your company if you leave before 5 years of service, here’s a basic guide on how to calculate the same. Note that the maximum limit of gratuity is ₹20 lakhs based on the applicable rules and regulations.

The usual formula is the following-

Gratuity = N * B * 15/26

The key parameters are the following:

• N: number of years of service
• B: Last basic salary + dearness allowance
• 15: 15 days of wages
• 26: assumption of number of working days in the month (excluding four Sundays)

So, in a regular scenario, if you’ve been working for 10 years at one company, and your last basic salary equaled ₹60,000 per month, the calculation will be the following:

10*60,000*15/26 = ₹3,46,153/-

Now, let us look at the gratuity eligibility conditions before and after 5 years.

When Can You Get Gratuity from Your Employer?

The Gratuity Act of 1972 outlines the eligibility conditions for receiving gratuity. Before we look at how it works, it’s important to understand what continuous service means, i.e. uninterrupted employment. Hence, if you leave one company and again come back to it later, then your service will not be continuous even if you cumulatively cross five years with the organization.

These are some pointers that will help you understand how it works.

1. You’ll be eligible to get gratuity from your company if you have been in continuous service for at least five years.
2. If a 5-day workweek is followed by your company, then gratuity will be applicable after 4 years and 190 days of service.
3. Alternatively, if the organization follows a 6-day workweek, then you’ll be able to claim gratuity after a service period of 4 years and 240 days.

Hence, to answer the question at the beginning of the article- you will be eligible for gratuity before 5 years in case the second or third point comes into play. This may come as a big relief if you’ve been looking to take up a more promising job opportunity elsewhere, and were sticking with the organization simply due to the 5-year rule.

Also, there are some other scenarios where the 5-year rule is not mandatory. These include the following:

• Demise of the employee
• Incapacitation of the employee due to an illness or accident
• Retirement

Also keep in mind that temporary employees or interns are not eligible to get gratuity benefits as per the prevailing regulations. However, there’s a slight tweak for journalists- they can get gratuity benefits in case they resign after three years of continuous service.

Conclusion

To sum up, it is possible to receive gratuity before 5 years, subject to meeting certain conditions which are mentioned above. In all other cases, gratuity is paid after completing 5 continuous years of service. You should note all these rules carefully and figure out whether they apply to you before leaving your current organization. Also, ensure that you choose a nominee for your gratuity payment after completing one year of service.

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.