Gratuity Rule: Gratuity is a type of reward that a company provides to its employee in return for long-term loyal service. It is a legal right that is ensured under Indian labour law. The main purpose of gratuity is to provide financial security to employees when they leave their job, retire or separate from the company for any other reason. This system encourages employees to work for a long time in the same organization and remain loyal to the organization.
Impact of 8th Pay Commission and new policies
The central government led by Prime Minister Narendra Modi has recently announced the formation of the Eighth Pay Commission, which will be effective from 2026. The main objective of this commission is to make necessary amendments in the salaries, allowances and pensions of central employees and pensioners. Also, the new Unified Pension Scheme has also come into effect from April 1, 2025. All these new policies and changes are likely to have a direct impact on the gratuity system as well. It is important for employees to be aware of these changes so that they can plan their future better.
According to Indian labour law, the most important condition for receiving gratuity is that the employee must work continuously for at least five years in the same company. Only after completing this period, the employee becomes entitled to gratuity. This rule is strictly followed and no exemption is given in it. The employee gets this benefit only after completing the period of five years, whether he leaves the job due to retirement, resignation or leaves the company for any other reason. This system has been created to bring stability in the employees and maintain a long-term relationship with the company.
Calculation of time in case of gratuity is a very important and sensitive topic. If an employee works for four years and eleven months in a company, he will not be entitled to gratuity, even if he is only one month away from completing five years. This rule is quite strict and no flexibility is shown in it. However, there is a special provision that if the employee has worked for four years and eight months, then gratuity will be given considering it as a full five years. But if an employee works for four years and seven months or less, he does not get gratuity and his service time is considered only four years.
Method of calculating gratuity
A specific formula is used to determine the amount of gratuity which is based on the last salary and years of service of the employee. This calculation is mainly done based on the basic salary of the employee. The standard formula for calculating gratuity is: Gratuity amount = Last salary multiplied by 15 divided by 26 multiplied by the number of years of service completed. In this formula, the figure 15 represents the number of working days in a month and the figure 26 represents the total number of days in a month. This calculation is done on a completely legal basis and it is mandatory for all companies to follow it.