Gratuity
Gratuity is a statutory lump-sum benefit paid to employees in India on exit after five or more years of continuous service, under the Payment of Gratuity Act, 1972. It is calculated as fifteen days' wages for each completed year of service.
The Payment of Gratuity Act, 1972 requires employers with 10 or more employees to pay gratuity to any employee who separates after five or more years of continuous service - through superannuation, retirement, resignation, or (with the service requirement waived) death or disablement. It is a one-time, lump-sum benefit rather than a recurring payroll cost, so employers typically accrue it as a liability rather than paying it out monthly.
The statutory formula is 15 days' wages for every completed year of service: last drawn basic salary plus dearness allowance, divided by 26 (the Act's assumed working days in a month), multiplied by 15, multiplied by years of service. A part-year of more than six months rounds up to a full year. Section 4(3) caps the statutory amount payable at 20,00,000 rupees, though employers can pay more ex gratia.
For US companies employing staff in India, whether through an EOR or their own entity, gratuity is a real, accruing liability from an employee's first day, even though it is only paid out on qualifying exit. It should be budgeted as part of fully-loaded cost, not treated as a contingent or optional expense.
References
- The Payment of Gratuity Act, 1972 — Ministry of Labour & Employment, Government of India