Question

With reference to staff benefits, explain the following:

Gratuity

Answer 1

Gratuity is a lump sum payment made by an employer to an employee as a reward for long-term and continuous service, typically upon retirement, resignation, or death. It is paid only after completing a minimum of 5 years of continuous service in the same organisation. The payment recognises the employee’s loyalty and contribution. The amount depends on the last drawn basic salary plus dearness allowance and the number of years of service. Gratuity is governed by the Payment of Gratuity Act, 1972 in India.

Formula for employees covered under the Act:

Gratuity = `"(15 × Last drawn salary × Number of years worked)" / 26`

 where salary = basic pay + dearness allowance