Gratuity rules you should know before leaving your job

The Payment of Gratuity Act of 1972 mandates that employers pay gratuities to eligible employees. Gratuities are a type of employee welfare scheme that rewards employees for their efforts towards the organisation. They are meant to fund a comfortable retirement for the employee after years of dedicated service.

If you are nearing retirement and plan to leave your job soon, it is imperative to understand the gratuity rules. This will help you know the gratuity benefit to which you are entitled. So, let’s decode the rules for the payment of gratuity.

Are you eligible for gratuity?
 

The first thing to assess is whether you fulfil the gratuity eligibility criteria to claim the benefit. Under the Payment of Gratuity Act, if your company employs more than 10 employees, it must pay gratuity in CTC.

Gratuity is payable in the following instances -

1. Superannuation
2. Retirement
3. Voluntary retirement
4. Retrenchment
5. Death
6. Disablement
7. Termination of the employee without his fault

However, the employer can reject the gratuity payment if the employee is terminated due to misconduct, such as theft or embezzlement.

As an employee, you should fulfil the following criteria to claim gratuity -

1. You are eligible for superannuation
2. You have completed 5 years of continuous service

However, in case of disability due to a disease or an accident, you can claim gratuity even before completing 5 years of service.

Your employer should pay you the gratuity after you retire or switch jobs. If the payment is delayed, the employer will incur an additional interest payment on the delayed amount. The interest rate is fixed and periodically reviewed by the government.

How is gratuity calculated?
 

According to the gratuity rules in India, there’s a simple formula for calculating the amount. Two factors are used in the formula, which also affects your gratuity amount. These are as follows -

1. Last drawn salary
 

This is the basic monthly salary you receive before retiring or resigning from your job. It includes your basic pay and dearness allowance.

2. Completed years of service
 

This calculates the aggregate number of years you have worked for the current organisation without any breaks. The formula uses whole numbers to represent the total number of years you have worked. The number of months is rounded off to the nearest year. If the number of months is below 6, the previous year is considered. If it is more than 6 months, the next year is considered.

For instance, if you have worked for 10 years and 4 months, the completed years of service will be 10. On the other hand, if you have worked for 10 years and 7 months, the figure will be 11.

Besides these two factors, a fraction is also considered in the gratuity calculation formula. This fraction depends on whether your organisation is covered under the Act or not. In the former case, the fraction is 15/26, while in the latter, it is 15/30.

Bringing all the components of the gratuity calculation, the formula is as follows -

1. If your organisation is covered under the Act
 

Gratuity = last drawn salary X completed years of service X 15/26

2. If your organisation is not covered under the Act
 

Gratuity = last drawn salary X completed years of service X 15/30

Let’s understand with an example -

Common misconceptions about gratuity
 

Many people have certain misconceptions about gratuity. Let’s explore some of the most common ones and see the real picture.

1. Misconception - Gratuity is an optional bonus.

Reality - Gratuity is a statutory payment your employer must pay if you are eligible.

2. Misconception - 5 years of service are a must for receiving gratuity.

Reality - In some cases, you can receive gratuity even without completing 5 years of service. This happens in the case of a disability due to an accident or illness. Moreover, in some cases, gratuity is payable even after completing 4 years and 7 months of service.

3. Misconception - You will lose your gratuity if your employer goes bankrupt.

Reality - Even if the employer files for bankruptcy, it will have to pay the gratuity liability.

4. Misconception - The full value of gratuity is tax-free.

Reality - For government employees, the full value of gratuity is tax-free. However, per the new gratuity rules for private sector employees, the maximum tax-free gratuity limit is ₹20 lakhs.

How to claim gratuity?
 

If you are eligible for gratuity, here’s how you can claim it -

1. Step 1 - Fill out the gratuity application in Form I and submit it to your employer to formally request a gratuity payment.
2. Step 2 - Your employer will acknowledge the receipt of the application and verify it.
3. Step 3 - Your employer will calculate the gratuity amount you are eligible for.
4. Step 4 - Your employer is required to pay you the gratuity amount within 30 days. If delayed, an added interest will be payable on the same.
5. Step 5 - In the case of any dispute regarding the gratuity payment, you can escalate the matter to the controlling authority of your region. To do so, you have to fill out and submit Form N.
6. Step 6 - If you or your employer is dissatisfied with the controlling authority’s decision, you can file an appeal within 60 days with the appellate authority.
7. Step 7 - In non-dispute cases, you must submit relevant documents to claim gratuity. These documents include -

●  Form I

●  Proof of the last drawn salary

●   Copy of your service certificate or any other employment proof

Making the most of gratuity payments
 

Gratuity is your legal right if you fulfil the eligibility criteria. It is the reward for your dedication towards your organisation. So, before leaving your job, know the applicable gratuity rules to be fully prepared to claim what’s yours.

Open an  IDFC FIRST Bank Savings Account for seamless fund transfers so you can comfortably transition into your next phase. With interest up to 7.25% per annum and monthly interest credits, you can grow your savings to fund a comfortable retirement.

Download the  IDFC FIRST Bank Mobile Banking App and manage your funds at your fingertips. Check your balance, invest in other avenues without hassle, and achieve financial independence in your golden years.