Recently, a significant change has been made to gratuity rules under the new labour code. Now, gratuity will be paid even after just one year of service. The question is how gratuity is calculated, what its formula is, and which employees will benefit from it. Let’s learn everything about gratuity in detail.
What changes have been made in the new labour code
Previously, a minimum of five years of service was required to receive gratuity. However, the new rules have provided significant relief to fixed-term and contract employees. Now, such employees will be eligible for gratuity even after working for just one year. This change will strengthen the financial security of temporary employees and provide them with the same social security benefits as permanent employees. This change has been made keeping in mind the changing nature of employment.
What is gratuity, and how is it calculated
Gratuity is paid under the Payment of Gratuity Act, 1972, and until now, a minimum of five years of service was required for this payment. With the new rule changes, fixed-term or contract employees will now be eligible for gratuity even after just one year of service. This will enhance the financial security of such employees.
Employees often wonder how much gratuity they will receive after just one year of service. The answer is quite simple, as the formula for calculating gratuity is already established. Essentially, the employee’s last basic salary and dearness allowance (DA) are added. This total is multiplied by 15 and then divided by 26, where 26 represents the average working days, and 15 represents the fixed gratuity days.
Gratuity = (((Last Basic Pay + DA) * 15) / 26) * Service Length
Calculating Gratuity on a Salary of ₹25,000
Employees are often confused about why 26 is used in the gratuity formula. According to the Labor Code, an average of 26 working days in a month is considered to be 26, as this is the number of normal or actual working days after subtracting weekly offs and other holidays. This is why 26 is used in gratuity calculations. If an employee’s last salary is ₹25,000 (assuming DA is zero) and they leave the job after one year of service, their gratuity can be easily calculated.
Using the formula
Gratuity = ((25,000*15)/26)*1 = ₹14,423
Therefore, one year of service will result in a gratuity of approximately ₹14,423.
Keep these things in mind before receiving gratuity
To understand gratuity in simple terms, it can be an amount equal to your last basic salary plus 15 days’ salary of DA. However, the higher your basic salary, the higher the gratuity amount. The rule is that if an employee has completed more than 6 months with the company, it is considered one full year of service. This means that even with 11 months of service, you can be entitled to gratuity. The biggest relief is that gratuity is completely tax-free, so the entire amount is received straight away.
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