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In India, the rules and regulations regarding gratuity are governed by the Payment of Gratuity Act, 1972. Gratuity is a statutory benefit provided to employees by their employers as a form of appreciation for their long and meritorious service. It is typically a lump sum payment made at the time of retirement, resignation, or death of the employee. The payment is calculated based on the employee’s length of service and their last drawn salary.

The applicability of gratuity in India is governed by the Payment of Gratuity Act, 1972. According to the Act, gratuity is applicable to establishments employing 10 or more employees, either directly or through contractors, during the preceding 12 months. The Act covers employees in factories, mines, oilfields, plantations, ports, railways, shops, or other establishments as notified by the government.

An employee becomes eligible for gratuity after completing a minimum of five years of continuous service with an employer. However, in case of an employee’s death or disablement, the requirement of five years of service is not applicable, and the gratuity becomes payable immediately.

The formula to calculate the amount of gratuity is as follows: Gratuity = (15/26) x (last drawn salary) x (number of completed years of service)

In this formula:

  • “15” represents the 15 days of salary for each completed year of service.
  • “26” signifies 26 working days in a month.

The last drawn salary considered for calculation includes basic salary and dearness allowance. However, it does not include any other allowances such as HRA (House Rent Allowance), conveyance allowance, medical allowance, etc.

The employer is responsible for paying the gratuity amount to the eligible employee within 30 days from the date it becomes payable. If the gratuity amount is not paid within this timeframe, the employer may be liable to pay interest on the outstanding amount.

It’s important to note that the maximum amount of gratuity payable is capped at Rs. 20 lakhs. This means that even if the calculation based on the above formula exceeds Rs. 20 lakhs, the maximum gratuity amount that can be paid is Rs. 20 lakhs.

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