Group Gratuity

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Gratuity is given by the employer to the employee in lieu of the services rendered during the period of employment. Here, we’ll get to learn the criteria for the premium calculation of the Group Gratuity policy.  The gratuity is usually paid at the time of retirement but can be paid earlier, provided below conditions are met –

  1. The employee has completed a minimum of five years of service with an organization and
  2. Death of an employee or disability due to an accident or disease

Calculation of the gratuity amount payable depends on two factors:

 

  1. Last drawn salary and

 

  1. No. of years of service

 

The gratuity amount is equal to 15 days of last drawn salary for each completed year of service. Last drawn salary includes basic salary, dearness allowance and commission received on sales if any. The formula is as follows –

Gratuity Amount = (15 X last drawn salary X tenure of working) divided by 26

 

Illustration – Suppose an employee’s last drawn basic pay is Rs 60,000 per month and he has worked with the company for 20 years and 7 months. In this case, using the formula above, gratuity will be calculated as:
(15 X 60,000 X 21)/26 = Rs. 7.26 lakh

In the above case, we have taken 21 years as the tenure of service because the employee has worked for more than 6 months in a year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into account while calculating the gratuity amount.

Retirement gratuity is calculated as one-fourth of a month’s basic pay plus dearness allowance is drawn before retirement for each completed six monthly period of service. The retirement gratuity payable is 16 times the basic pay subject to a maximum of Rs 20 lakh.

An employer can pay out the gratuity proceeds from his current revenue but this can cause financial strain at times.  An efficient way of meeting the gratuity liability is through a group gratuity policy which

  1. helps to ascertain the liability and
  2. set up a gratuity fund and pay contributions as and when required
  3. earn good market-linked returns from an investment of the fund

 

Actuaries help in the assessment of the gratuity liability of a company, i,e the optimum amount to be maintained in the gratuity reserve fund. Group Gratuity liability premium depends on the following factors –

 

  1. Average tenure,
  2. Average salary,
  3. Average age,
  4. Total employee strength and
  5. No of employee deaths in last 3 years

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