Employee benefits
Gratuity is a monetary benefit that employers pay to their employees as a token of appreciation for their long service and contributions to the company. It is a statutory benefit in India, governed by the Payment of Gratuity Act, 1972.

The Act applies to all establishments with ten or more employees, except government establishments and educational institutions.

Eligibility for gratuity.

To be eligible for gratuity, an employee must have completed at least five years of continuous service with the employer.

Counted as continuous service

Periods of leave with wages, such as sick leave and casual leave.

Not counted

Periods of absence without leave, or on paid leave without wages.

The gratuity fund.

Employers typically create a gratuity fund to fulfil their gratuity obligations. The fund is managed and invested to ensure that sufficient money is available to meet payouts when employees become eligible.

Employers can manage the fund themselves, or invest in gratuity group insurance policies with insurance companies.

Requirements to open a gratuity fund.

  • The establishment must have ten or more employees (except government establishments and educational institutions).
  • The employer must have a gratuity policy in place.
  • The employer must appoint trustees for the gratuity fund.
  • The employer must open a bank account for the gratuity fund.

How to open a gratuity fund.

  1. Set up a trust deed and appoint trusteesThe trust deed is the legal document that sets out the rules of the fund. Trustees manage the fund and ensure it is used for its intended purpose.
  2. Decide the investment policyDevelop it with a financial advisor, taking into account the employer’s risk tolerance and the needs of employees.
  3. Open a bank accountThe account should be held in the name of the trustees of the gratuity fund.
  4. Start contributing every monthThe contribution is based on the Basic Salary of active employees.

Benefits of a gratuity fund.

Tax benefits

Contributions to the gratuity fund are tax-deductible for employers.

Investment income

The fund can be invested to generate income, which helps offset the cost of gratuity payments.

Financial security

Protects the employer if many employees retire or leave at the same time.

Employee satisfaction

Improves morale by showing the employer is committed to taking care of its people.

Opening a gratuity fund is a good way to meet gratuity obligations and provide financial security for employees.

It is also a tax-efficient way to save for gratuity payments. Employers who are considering opening a gratuity fund should consult a financial advisor to discuss the best option for their business.