What is Gratuity?

Meaning & Definition


Gratuity is a financial benefit that is typically paid by an employer to an employee as a form of gratitude or recognition for the employee’s long and loyal service to the organization. It is a statutory benefit provided under labor laws in many countries, and its primary purpose is to provide financial support to employees upon their retirement, resignation, or after a specified length of service with the employer.

Key features of gratuity

  • Eligibility

Eligibility for gratuity often depends on the length of service with the employer. In many countries, employees become eligible for gratuity after completing a specific number of years, which can vary by jurisdiction and organization.

  • Calculation

The amount of gratuity is generally calculated based on a formula that considers the employee’s last drawn salary, the number of years of service, and specific factors defined by labor laws. The exact calculation method may vary from one country to another.

  • Payment Conditions

Gratuity is typically paid upon the occurrence of specific events, such as retirement, resignation, or death of the employee. Some countries also provide for gratuity payments in the event of disability or incapacitation.

  • Taxation

The tax treatment of gratuity varies by country. In some places, gratuity may be fully or partially tax-exempt up to a certain limit, while in others, it may be subject to taxation.

  • Beneficiary

In the case of an employee’s death, gratuity is usually paid to the legal heirs or beneficiaries specified by the employee.

Gratuity serves as a financial safety net for employees who have devoted a significant portion of their working lives to a single employer. It provides a source of income to help them manage their financial needs during retirement or after leaving the company. The intention behind gratuity is to acknowledge the dedication and service of employees and to offer them a measure of financial security in recognition of their loyalty.

Employers are legally obligated to provide gratuity in many countries, and it is considered an essential employment benefit. The rules and regulations governing gratuity, including the eligibility criteria and calculation method, can vary between countries and regions, so it is important for both employees and employers to be familiar with the applicable labor laws in their jurisdiction.

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