Section 21: Calculation and Formula for Gratuity

Overview

This section deals with Gratuity, a significant social security benefit payable to employees in recognition of their service. Section 21 of the Code on Social Security, 2020, specifically outlines the method for calculating the gratuity amount an employee is entitled to.

Who is Covered?

• The Code generally applies to all establishments employing ten or more employees. However, specific gratuity provisions may extend to establishments with fewer employees based on state-level notifications.
• To be eligible for gratuity, an employee must have rendered continuous service of five years. This requirement is relaxed in cases of death or disablement due to accident or disease.
• There is no upper wage limit for eligibility under the Code on Social Security, 2020, unlike some previous regulations.

Benefits and Contributions

• Benefit to Employee: Gratuity is a lump-sum payment made to an employee upon retirement, resignation, death, or disablement.
• Contribution Responsibilities: Gratuity is solely the responsibility of the employer. Employees do not contribute to the gratuity fund. The employer is responsible for funding the gratuity scheme, often through a trust or insurance policy. The government does not directly contribute.

Procedure and Compliance

Calculating gratuity under Section 21 involves the following steps:

1. Determine Wages: 'Wages' for gratuity calculation include basic salary, dearness allowance, and commission earned by the employee. It excludes any house rent allowance, overtime allowance, bonus, or profit-linked remuneration.
2. Calculate Days of Service: For every completed year of service, 15 days’ wages are considered. Any fraction of a year exceeding six months is also counted as a completed year.
3. Apply the Formula: Gratuity = (Last Drawn Wages x Number of Completed Years of Service x 15) / 30
4. Maximum Limit: The gratuity payable is subject to a maximum limit as notified by the Central Government. This limit is periodically revised.
5. Piece-Rated Employees: For employees paid on a piece-rate basis, the average daily wages calculated over the last three months are used for gratuity calculation.

Practical Examples

• Example 1: Employee Eligibility – Mr. Sharma worked for a company for 7 years and 2 months. His last drawn wages are ₹50,000 per month. He is eligible for gratuity as he has completed more than 5 years of service.
• Example 2: Non-Compliance – A company delays the payment of gratuity to an employee after their retirement. This constitutes a violation of the Code on Social Security, 2020, and the employee can approach the appropriate authority (Labour Commissioner) for redressal. Penalties may be imposed on the employer.

Disclaimer

This article is for basic understanding of social security law and should not be treated as legal advice. Laws and regulations are subject to change, and it is recommended to consult with a legal professional for specific guidance related to your situation.