Gratuity is a financial benefit given by an employer to an employee as a reward for long-term service. It is usually paid when an employee leaves a job due to retirement, resignation, death, or disability.

To be eligible, an employee typically needs to complete 5 years of continuous service. However, in cases like death or disability, this condition is waived.

The gratuity amount is calculated based on the employee’s last drawn salary and years of service:
Gratuity = (15/26) × Last Drawn Salary × Years of Service
The calculation should be done as per the wages definition under Section 2(y) of the Social Security Code, 2020.

Gratuity for Fixed Term Employees (FTE)

For Fixed Term Employees, gratuity is more flexible. Even if they have not completed 5 years, they are still eligible if they have worked for the duration of their contract. The gratuity is calculated on a pro-rata basis, meaning it depends on the actual period worked. This ensures fair compensation even for shorter-term roles.

Gratuity in Case of Death

In unfortunate cases of an employee’s death, gratuity is still payable regardless of years of service. The amount is calculated based on the service completed and is paid to the nominee or legal heirs. If no nominee is assigned, the legal heirs receive the benefit, ensuring financial support to the family.

Note: It is legally required for employers to obtain a gratuity nomination form from all employees to ensure smooth disbursement of benefits in such situations.

In simple terms, gratuity is a way for employers to say “thank you” for an employee’s dedication and also to provide financial security in critical situations.