Gratuity is a statutory lump-sum payment by an employer to an employee on separation after completing 5 years of continuous service, mandated by the Payment of Gratuity Act, 1972.

HR & Payroll Concepts

What is Gratuity?

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Gratuity: Gratuity is a statutory lump-sum payment by an employer to an employee on separation after completing 5 years of continuous service, mandated by the Payment of Gratuity Act, 1972.

Gratuity Calculation

Gratuity = Last Drawn Basic Salary × 15/26 × Number of Years of Service. Example: Basic ₹30,000, 10 years service → ₹30,000 × 15/26 × 10 = ₹1,73,077. Maximum tax-exempt gratuity: ₹20 lakh (raised from ₹10L). Gratuity is payable within 30 days of leaving; delayed payment attracts simple interest.

Gratuity Provisioning

Best practice: provision gratuity monthly as a percentage of basic salary (approximately 4.81% = 15/26/12). This creates a monthly expense and liability provision. Alternatively, fund via a group gratuity insurance policy (LIC or private insurers). ERPNext can post monthly provisioning via a salary component or a recurring journal entry.

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