Gratuity

Gratuity is the obligation that accrues quietly for five years and then arrives as a single number on the day someone resigns. Nothing is payable until the five years are complete, which is exactly why it is so often absent from a cost model right up until it is due.

Who it applies to

The Payment of Gratuity Act applies to establishments with ten or more employees, and it is not something an employment contract can opt out of. Once the threshold is met the obligation attaches to every employee who completes five years of continuous service.

This catches foreign employers in a way that is easy to miss. A company with two people in India may reasonably assume it sits below the threshold — but where those people are employed through an employer of record, the employer is the EOR, and the threshold is assessed against that establishment rather than against the client’s headcount.

The calculation

The calculation takes the last drawn basic salary, divides by twenty-six, multiplies by fifteen, and multiplies again by completed years of service.

For an employee leaving after seven years on a basic salary of ₹60,000 a month, that is approximately ₹2,42,308 — payable at once, on exit.

Note which figure drives it. Gratuity is calculated on basic pay, not on total cost, which is the second reason the basic proportion of a package is a cost decision rather than a formatting one.

It should be provisioned monthly, not discovered

The liability builds from the first day of employment even though nothing is payable for five years. Treating it as a future problem means the whole of it lands in a single month, against whichever budget happens to be open.

The common approach is to accrue it monthly as a percentage of basic — roughly 4.81 per cent, being fifteen days over twenty-six, spread across twelve months. That figure is an indicative accrual for cost modelling. The provision actually booked in the accounts is set by actuarial valuation, which is a different exercise with a different answer.