💡 Financial Definitions
What is Gratuity?
Understanding the Meaning and Purpose of End of Service Benefits
Gratuity Meaning
Gratuity is a lump-sum amount paid by an employer to an employee as a token of appreciation for the services rendered to the organization. It is usually paid at the time of retirement, resignation, or termination of employment.
Unlike a monthly salary, gratuity is a defined benefit plan. In many countries like the UAE and India, it is a statutory right mandated by labor laws, not just a voluntary bonus.
Why is it Important?
- Financial Security: It acts as a financial cushion during the transition period between jobs.
- Retirement Benefit: For long-term employees, it serves as a significant retirement corpus.
- Reward for Loyalty: It incentivizes long-term service with a single employer.
Gratuity vs. Pension
While both are retirement benefits, they differ significantly:
| Feature | Gratuity | Pension |
|---|---|---|
| Payment Type | One-time Lump Sum | Regular Monthly Income |
| Eligibility | Usually after 1-5 years | Usually at retirement age |