Gratuity Eligibility Before and After Completion of 5 Years

An employee is a person who is hired by an organization to work in a specific field that they have expertise in. The organization pays an employee for the services that he/she offers to the company.

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In general, there are two kinds of employees hired by any company, that are,

  • Part-Time / Contractual Employees
  • Full-Time / Permanent Employees

Contractual or part-time employees are hired for a specific period based on the length of the contract they are being offered by the company. Their remuneration is generally pre-decided and rarely changes during their contract tenure.

On the other hand, full-time employees are permanently hired by the companies till the time an employee resigns. Apart from the normal remuneration that an employee is offered as per his/her skills and field of work, another perk one is being offered is the gratuity amount.

In this article, you will get a walkthrough as to what exactly gratuity is and when is an employee eligible for the gratuity payment.

What Is Gratuity?

Gratuity is a kind of remuneration rendered to the employees by their respective employers during a specific period of employment. In simple terms, gratuity is a lump-sum amount offered to the employees of the company after an employee has completed 5 years in the same organization.

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 so that it aids an employee at the time of his/her retirement.

Employees have a lot of questions in mind when it comes to gratuity. Who is eligible for a gratuity? Can one receive gratuity before 5 years? What is the gratuity formula? How is gratuity calculated? Let us try and answer these questions step by step.

Gratuity Eligibility Criteria

To receive the gratuity amount, an employee needs to be eligible in 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, suffers disability due to accident, or critical illness

Can an Employee Receive Gratuity Before 5 Years?

Generally, employees who leave an organization after completing around 4 or 4.5 years come up with this question of gratuity eligibility. Even though the government is planning to work around the plan and come up with new amendments, currently the only eligibility criteria to receive gratuity is if the employee has completed 5 years successfully in the organization.

So, can an employee receive gratuity before 5 years? The answer is NO.

One has to complete 5 consecutive years in the company (without any gaps) to claim for gratuity at the end of his employment term with the organization.

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 say 25 years and earns a basic salary + dearness allowance of rupees 40,000 per month. The calculated for his gratuity will be as follows:

25 X 40,000 X 15 / 26

= Rs. 5,76,923/-

Important:

The gratuity amount also differs from one employer to another. This means that the employee can receive more gratuity amount as per his/her basic salary + DA.

Also, every six months is rounded off to a year only when the employee has completed a minimum of 5 years in the company. In simple words, if the employee has completed 7.6 years in the company, the gratuity amount will be rounded off and will be as per 8 years. Whereas, if the employee has completed 7.4 years in the company, 7 years’ gratuity payment will be made.

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 is falling 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.

Written By: PolicyBazaar - Updated: 06 October 2021
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