Importance of Gratuity Settlement for Employees in OpenHRMS

The retirement benefit acquired to an employee for service or sustained period of 5 years/more by an organization is referred to as gratuity. Initially, it began as a payment plan for working employees in factories, now expanded under government control. The Payment of Gratuity Act is capable to employees of mines, ports, railway companies, factories, etc. Employee settlement during the retirement process handles through OpenHRMS software. Based on certain conditions, gratuity is paid before the retirement of an employee. For example, it happens in the case of an accident, disease, or death of an employee. Basically, an employee is eligible to access gratuity after the completion of a minimum of five years in a firm.

The manager creates a Gratuity settlement for workers at the time of employee resignation. This amount is calculated based on the predefined equation. One of the vital components of OpenHRMS is the Gratuity Settlement application. We can manage all necessary employee settlements using the gratuity application in OpenHRMS. 

In this blog, let’s check out the importance of gratuity settlement for companies and employees with the use of OpenHRMS.

How Does Gratuity Work for Employees in a Company?

The eligibility for gratuity benefits is to employees who render service for more than five years within a company. Most companies pay gratuity through insurance plans or from their pocket itself. The gratuity cost is entirely paid by the employer in contrast to the employee provident fund. According to the Payment of Gratuity Act of 1972, a specific percentage of salary computed and invested in a gratuity account is payable later. Once an employee leaves an organization, gratuity settlement is a great asset for him/her. This is applicable to companies that cover more than ten employees. Labor can attain the gratuity amount at the time of retirement, layoff, death, termination, resignation, and more. The nominee of an employee can receive the payment due to the employer's death.

Applicability of Gratuity for Employer and Employee

One of the vital retirement benefit for employees is the gratuity plan. The tax-free gratuity doubled to an upper limit of 10 to 20 lakh in 2019. Using OpenHRMS, applying specific gratuity settlement configurations and managing employee salary details is easy. Let’s see the purpose of gratuity usage for employees and employers.


The Gratuity Act applies to various sectors such as factories, ports, shops, oilfields, plantations, and mine. Section 2 of the Act defines employee who works under the institution is applicable for gratuity. The employer considers a person who the government appoints if the workplace is under a state of the central government. If any person is not appointed, the department or head of the ministry is considered an employer. Furthermore, the individual appointed by the local authority acts as an employer if the workplace belongs to any local authority. In the case of non-appointment, Chief Executive Officer is considered an employer. In the other cases, the act contemplates a third scenario. A person or authority acts as an employer if they have ultimate control over the institution.


According to the Gratuity Act, an employee is a person who is employed on wages in terms of manual, any kind of work, or connection with a job. But, an individual under state or central government is not eligible for this act if they got other gratuity schemes in place already. Also, a teacher in the education sector is not applicable for gratuity under this scheme. Continuous service is another term defined in Section 2A of this Act. It defines the continuous service of employees with an exemption on sickness, accidents, lockout, and more not owing as the employee's fault. Employees must work for one year if they take a long time off in a year.

Benefits of Investing in Gratuity Scheme 

Stability and high yield are accessible to you once you receive your gratuity on retirement. A large sum is accessible to you after thirty to fifty years of service in an organization. You will get the gratuity amount after the resignation for five years. Hence, it is easy to invest a surplus amount for your future. Let’s examine the reasons to invest in gratuity schemes for employees and employers.

Tax Benefits

Three types of benefits are funded to employees through a gratuity scheme. Firstly, 8.33% of the basic salary is paid to the gratuity fund annually as a tax-deductible expense. Secondly, a contribution of 8.33% for each year of employee past service is paid to the gratuity fund once the gratuity liabilities are funded for the first time. Finally, investment or interest income gain through a gratuity fund is tax-free. The tax bill of a company reduces quickly with a planned funding strategy.

Cash Management

Once managing the in-house assets, companies can save expenses in investment management. It is helpful for big organizations needed to set up an in-house investment management team. Small-sized companies can manage the funds using third-party asset management.

Opportunity Cost

Companies must find the cash within the business to gratuity trust to fund gratuity liabilities. You must remember that gratuity fund interest is tax-free. Hence, a 10% expected return is equivalent to 14% of the pre-tax return. Excess cash is returned to dividends and shareholders, but it is less attractive than funding.

Cashflow Stability

Gratuity payments for employees are low for new companies. However, gratuity payouts enhance based on employees' longer work and age. Companies can reinstate enriching gratuity payouts with a stable stream of funds contribution.

How to Calculate Gratuity Amount?

As per the predefined formula, we can compute the gratuity payable amount. It is entirely based on the last drawn salary of the employee. The formula is given below:

(15*period of working*last drawn salary)/26

Here, the previous month's salary means the last drawn salary, and it is the sum of allowances and basic salary. The count of working years is the working period not equal to or greater than five to establish a gratuity settlement. Users can also define settlements instead of gratuity. 

You can configure employee settlements at resignation time using the OpenHRMS Gratuity Settlement module. The salary details of employees in a company payslip manage quickly by implementing OpenHRMS software in your system.