Gratuity

Gratuity is a lump sum payment made to an employee by an employer when employment ends after a qualifying period of service. It is a common statutory or contractual benefit designed to reward long service and provide financial support at termination.

Gratuity recognises length of service and is usually payable on retirement, resignation after minimum service, or death.

What is Gratuity

In HR terms gratuity is treated as a terminal benefit. Employers record it as a payroll liability and manage payments under company policy or local law. Calculation methods vary but they often use last drawn salary and years of service.

How does it work

Employers set eligibility criteria and calculate an amount based on a formula. Payroll teams accrue the liability, HR handles claims, and finance completes payment at separation.

Practical usage and examples

• Payroll accrual for long service awards and budgeting
• Compliance reviews to meet statutory requirements
• Including gratuity terms in employment contracts and exit checklists

Policy and procedure must specify eligibility, calculation and approval steps. Typical scenarios include retirement payouts, resignation after qualifying service, or survivor payments on death.

Related HR concepts

Related terms include severance pay, end of service benefits, pension, payroll compliance and termination policy.