Gratuity

Meaning & Definition

Gratuity is a one-time payment an employer gives to an employee as compensation for long-term service and is generally paid when an employee leaves due to retirement, termination, or other reasons. Under Indian law, gratuity is a legal obligation for employers to pay to their employees upon completion of a minimum period of service.

Important Features of Gratuity

• Provides an incentive for loyalty and extended service to the employer by way of a financial value.
• Financially supports former employees after they exit employment.
• Creates retention through benefits and satisfaction from work performed.
• One of the most important components of benefits and compensation for employees.
• Ensures employees receive proper statutory benefits as defined by law.

Legal & Regulatory Considerations

• The Payment of Gratuity Act, 1972, governs how gratuities are earned, which includes the eligibility criteria for receipt. 
• This law applies to all employers who have 10 or more employees. 
• In order to qualify for a gratuity, employees must work at least five years uninterrupted (with some exceptions due to death or disability).