Gratuity

2. What is Gratuity?
• The world “Gratuity” has been derived from the word
“Gratuitous’ which means Gift.
• It is a sum of money paid to an employee at the end of a
period of employment. It is a kind of retirement benefit. It is a
payment made with the intention of helping an employee
monetarily after his retirement.
Out of the several components that make up the gross salary of a
salaried individual, gratuity is one. Gratuity is a benefit payable under
the Payment of Gratuity Act passed in the year 1972.

3. Payment of Gratuity Act of 1972: In India
payment of gratuity is govern by payment of
gratuity act 1972. This law applies to all
establishments employing 10 or more workers.
Gratuity is payable to the employee if he or she
resigns or retires. The Indian government
mandates that this payment be at the rate of
15 days salary of the employee for each
completed year of service subject to a
maximum of INR 10,00,000.
How does Gratuity Work? (1/2)
Payment of gratuity works under “Payment of Gratuity Act of 1972”

4. How does Gratuity Work? (2/2)
When Gratuity is Payable?:
Following are the few instances when you will be eligible to receive gratuity.
• An employee should be eligible for superannuation
• An employee retires
• An employee resigns after working for 5 years with a single employer
The completion of continuous service of five years is not necessary
where the termination of the employment of the any employee is
due to death or disablement.

5. How to Calculate Gratuity?
The gratuity amount of an employee is calculated using the basic salary and
the dearness allowances if any.
Gratuity = [ (Basic Pay + D.A) x 15 days x No. of years of service ] / 26
Example:
Lets suppose Mr. XYZ’s basic pay is Rs.17,500 and the dearness allowance provided per
month is Rs.1500 and the year of service completed is 25 years.
Given,
Basic Pay = 17500
Dearness Allowance = 1500
Years of Service = 25
Applying the values in the formula,
Gratuity = [ (Basic Pay + D.A) x 15 days x No. of
years of service ] / 26
= [ (17500 + 1500) x 15 x 25 ] / 26
= [ 19000 x 375 ] / 26
= 7125000 / 26
Mr XYZ’s Gratuity = Rs. 2,74,038.46

6. Bonus

7. What is Bonus Payment?
 A bonus payment is usually made to
employees in addition to their base salary
as part of their wages or salary.
 Bonus is a reward that is paid to an
employee for his good work towards the
organisation. The basic objective to give
bonus is to share the profit earned by the
organisation amongst the employees and
staff members.
 In India there is a principle law relating to
this procedure of payment of bonus to
the employees and that principle law is
named as Payment of Bonus Act, 1965.

8. PAYMENT OF BONUS ACT, 1965
 An Act to provide for the payment of
bonus to persons employed in certain
establishments on the basis of profits or
on the basis of production or
productivity
 It extends to the whole of India. Every
other establishment in which twenty or
more persons are employed on any day
during an accounting year
The Payment of Bonus Bill having been passed by both the Houses of Parliament
received the assent of the President on 25th September, 1965. It came on the Statute
Book as THE PAYMENT OFBONUS ACT, 1965 (21 of 1965).

9. Bonus:: Eligibility and Applicability
Eligibility: Every employee not drawing salary/wages beyond Rs. 10,000 per month who
has worked for not less than 30 days in an accounting year,
 shall be eligible for bonus for minimum of 8.33% of the salary/wages even if there is
loss in the establishment whereas a maximum of 20% of the employee’s salary/wages is
payable as bonus in an accounting year.
 In case of the employees whose salary/wages range between Rs. 3500 to Rs. 10,000
per month for the purpose of payment of bonus, their salaries/wages would be deemed
to be Rs. 3500.
Applicability: The Act is applicable in whole of India where 10 or more workers are
working, or were working on any day of the preceding 12 months with the aid of power.
Or whereon 20 or more workers are working or were working on any day of preceding 12
months without the aid of power.

10. How to Calculate Bonus?
Calculation of bonus: Salary/wages and dearness allowance (DA) are included while
calculating bonus. However, other allowances such as over-time, house rent, incentive
or commission are not included.
Bonus Calculation in general
Bonus = (Basic Salary + DA)*12*8.33%
Forfeiture of Bonus: An employee who is dismissed from service on the grounds of
fraud, riotous or violent behaviour at the premises of the establishment or for the
theft, misappropriation or sabotage of any of the property of the establishment as
mentioned in the Act. This shall not only disqualify him from receiving the bonus for
the accounting year in which he was dismissed but also for the past years which
were remained unpaid to him.