Gratuity – a welcome windfall for many employees upon retirement or resignation. But do you know how changes in gratuity rules can affect you??. These changes have a significant impact on the amount you receive. If you're nearing retirement or planning a career move, this blog is for you. We'll delve into what gratuity is, how it's calculated, and how the new rules affect you.
Gratuity : Overview
Gratuity is a payout an employee receives upon retirement, resignation after five years of service, or termination (not due to misconduct). It's a way for companies to recognize your loyalty and contribution over the years.
How is Gratuity Calculated?
The gratuity amount is calculated using this formula:
Gratuity = (Last drawn basic salary + Dearness Allowance) * 15/26 * Total Years of Service
Where,
Last drawn basic salary: This is your basic pay without any allowances.
Dearness Allowance (DA): This is an allowance to adjust for inflation.
Total Years of Service: This includes the complete months you've worked, rounded up to the next year.
15/26: This is a constant factor mandated by the Act.
There's also a maximum limit on the amount of gratuity payable, which is currently Rs. 10 lakh.
Who is Eligible for Gratuity?
Employees: The Act covers employees working in various sectors like factories, mines, plantations, ports, railways, shops and establishments with at least 10 employees.
Service Requirement: Generally, employees must complete five years of continuous service to be eligible. However, exceptions exist in cases of death, superannuation, or permanent disability.
What is the Payment of Gratuity Act, 1972?
What is the Payment of Gratuity Act, 1972?
The Payment of Gratuity Act, 1972 mandates Indian corporations in sectors like railways, ports, factories, mines, shops, and oilfields to provide a one-time gratuity payment to retiring employees. This benefit applies to those classified as "employees" under the Act's Section 2(e) and Section 4.
The gratuity amount is calculated as 15 days' wages for each completed year of service, with even partial years (over six months) counted. This Act serves as a social and financial safety net for employees by offering them a security measure after retirement, recognizing their long-term service to the company.
Changes of Gratuity Rules and its Impact
Increased Base Salary Impact: Previously, there was no restriction on the ratio between your basic pay and allowances. Now, companies must ensure your basic salary makes up at least 50% of your Cost To Company (CTC). This means a larger portion of your income will be considered for gratuity calculation, leading to a potentially higher payout.
Overtime Inclusion: Any overtime pay you receive for working more than 15 minutes will now be included in the gratuity calculation. This further inflates the gratuity base, benefiting employees who regularly work overtime.
Here are some points to consider:
- These changes are relatively new, so ensure your company adheres to the updated gratuity calculation.
- If you have any questions about your gratuity entitlement, consult your HR department or a legal professional.
Conclusion
Understanding the new gratuity rules is important, especially if you're nearing retirement or a job change. These changes can put more money in your pocket! Thanks to a higher base salary being used in the calculation and overtime being included, you might receive a bigger gratuity payout. So, knowing your rights and how gratuity is calculated can help you plan for a secure future.