The gratuity system for government employees has been revised, introducing a new policy under the Unified Pension Scheme (UPS) that will take effect on April 1, 2025. This scheme combines features of the Old Pension Scheme (OPS) and the National Pension System (NPS), ensuring employees a minimum pension after completing 10 years of service. A key highlight of this change is the regulation of gratuity payments for employees covered under this scheme.

Gratuity Calculation Formula

Gratuity is calculated based on the final salary (basic salary and dearness allowance) of an employee using a specific formula. The gratuity amount will be either 16.5 times the final salary or Rs. 25 lakh, whichever is lower. The maximum gratuity limit has been increased by 25%, now set at Rs. 25 lakh. Additionally, the dearness allowance has also been increased to 50%, further impacting the gratuity calculation.

However, despite this increased limit, not all government employees will receive the full Rs. 25 lakh gratuity. The actual amount depends on the employee’s length of service and salary. Gratuity is directly related to both the length of service and the final salary of the employee.

Retirement Gratuity Calculation

Retirement gratuity is calculated by adding one-fourth of the basic salary and dearness allowance for every six months of service. The maximum gratuity an employee can receive is either 16.5 times their final salary or Rs. 25 lakh, whichever is lower. To be eligible for retirement gratuity, employees must have served in the same department for at least five years.

Gratuity Payment in Case of Employee’s Death

If an employee dies before retirement, their family is entitled to gratuity based on the length of the employee’s service:

  • Less than 1 year: 2 times the salary.
  • 1 to 5 years: 6 times the salary.
  • 5 to 11 years: 12 times the salary.
  • 11 to 20 years: 20 times the salary.
  • More than 20 years: Half the salary every 6 months.

Unified Pension Scheme (UPS) and Gratuity

The new Unified Pension Scheme (UPS) will serve as an alternative to both the Old Pension Scheme (OPS) and the National Pension System (NPS). The UPS aims to provide a minimum pension of Rs. 10,000 to employees who have completed 10 years of service.

Although the UPS introduces a new pension system, questions were raised in Parliament about whether gratuity would be paid under this scheme. The Finance Ministry has clarified that gratuity will still be paid under the Central Civil Services (National Pension System) scheme, even under UPS, from 2021.

While UPS brings in a new pension scheme, the rules related to gratuity will remain the same, and employees will continue to receive gratuity as per the existing guidelines and rules.