The Importance of Gratuity and How to Calculate It

September 18, 20191:05 pm18077 views

In the field of human resources, gratuity is important for strategic employment. It is meant to bring stability and build loyalty. However, there are many companies that lack this knowledge and leave the rules behind which then affects badly for company’s bottom line.

What is gratuity?

Gratuity is commonly referred to as a statutory benefit paid to employees who have rendered continuous service for at least five years. It is in the form of a lump-sum amount paid to employees based on the duration of their total service.

Likewise, gratuity should be paid because it is important as a form of social security provided by employer to the employees in monetary terms for the total service employees have worked with employers. Yet, gratuity might increase following salary and tenure of employment.

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In India, the gratuity practice is stated under Payment of Gratuity Act, 1972. While the Singapore Government has its written clause under a contract of Employment act that is written as “gratuity is being paid on discharge or retirement.”

In addition, Singapore law stated that gratuity payment is given to employees with respect to their employment that does not constitute a salary. For example, employees can be rewarded on the gratuity payment which is made to reward employee’s good performance, reward employees for completion of a contract/project, entice an employee to remain in employment, or recognise employee’s service with an employer and still earn the full salary.

In short, gratuity can be referred to as some kind of tips or financial incentive given to employees for being in service and for his loyalty towards the company. It is like a benefit that acts as a post-retirement plan.

Calculating gratuity

Generally, the calculation of gratuity amount will depend upon the tenure of service and salary. Tenure of service is the number of years working in an organisation and if the time period is over six months and less than a year, it is considered as one year. Hence, if an employee worked for 5 years and 7 months, the gratuity tenure is considered as 6 years tenure. Meanwhile, if employees work for 5 years and 4 months, the gratuity is considered as 5 years.

For employees who are working in corporate jobs and receiving a monthly salary, the calculation will be as follows:

Gratuity = 15 days of monthly salary for every completed year of service

The formula = (SALARY x TENURE x 15) / 26

*Example ($2,900 x 21 years x 15) /  26 = $35,134.6154

Gratuity rules
  1. Gratuity is still payable if an employee dies and he is paid for the number of years he has worked with the company regardless of tenure.
  2. Gratuity is still payable if an employee becomes physically challenged due to some illness regardless of tenure.
  3. Gratuity is NOT payable if an employee has been terminated on the grounds of illegal activity, violence, immoral act or theft.
Failure to pay gratuity

Under the state law, especially in India region, if employers fail to pay gratuity amount, they are liable for punishment. Under the clause as written by Helpline Law, here are the punishment employer will receive.

  1. If an employer fails to make payment for any gratuity payable to employees, he shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to two years.
  2. If an employer makes default in complying with any of the provisions of this Act, there will be imprisonment for an employer for a term which shall not be less than three months but may extend to one year or by a fine.
  3. If an employer makes any false statement or false representation in order to avoid any payment, there will be imprisonment for a term which may extend six months or by a fine. 

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