The most common requirement of the majority of employees is security and maintenance for the later life. This can only be possible when the person gets financial assistance, for his/her survival. Gratuity is one of the old-age retiral benefits, in which an employee gets one-shot payment, from the employer, for the services rendered by him/her to the enterprise.
Likewise, there is another retirement plan called as pension, which guarantees continuous payment of fixed sum to the person or his dependent survivors, for the services rendered by him/her to the organisation.
Both gratuity and pensions are schemes by the government that help salaried employees, to live their life comfortably after they retire or leaves the establishment. The article makes an attempt to shed light on the differences between gratuity and pension, so take a read.
Content: Gratuity Vs Pension
|Basis for Comparison||Gratuity||Pension|
|Meaning||Gratuity can be understood as a social security benefit provided to the employees by the employer in appreciation of service, after their retirement or death.||Pension is a saving scheme, wherein employer invests certain sum to guarantee payment of definite sum at regular intervals, to the employee or his/her dependent survivors, after retirement or death.|
|What is it?||Gift||Retirement plan|
|Payment||Lump sum payment||Installment Payment|
|Contributory service||Minimum 5 years of service is required.||Minimum 10 years of service is required.|
Definition of Gratuity
Gratuity can be defined as an after-retirement social security benefit, provided to the employees by the employer on account of the services provided by them to the establishment. Simply put, gratuity is a mark of recognition, that an employer gives to his/her employee for his contribution to the company when he/she leaves or retires. Under this scheme, a lump sum amount is paid to the employee depending on the years of service and last drawn salary.
An employee is eligible for receiving a gratuity, when there is termination of employment after he/she has served the organisation for five years of more, due to superannuation, retirement/resignation or death/disablement, as a result of accident or disease. Nevertheless, the completion of service for five years is not mandatory, where the employment contract ends out of disablement or death.
The amount of gratuity is given to the employee himself but on the demise of the employee, the amount is handed over to the nominee, when the nomination is performed and to the legal heirs, in the absence of any nomination.
In India, gratuity is governed by Payment of Gratuity Act, 1972, which applies to every establishment employing ten or more employees.
Definition of Pension
By the term pension, we mean a certain amount paid in periodic instalments, to a person for his/her life after retirement. It is provided by the employer, which can be a government organisation or any other company to the ex-employees or the surviving dependents of the ex-employee, on account of the services provided by him to the organisation. It is a long-term saving plan, which is in the form of perpetuity.
The pension is a scheme in which certain amount is added by the employer, during the years of service. It is a kind of retirement plan that ensures monthly income, after the termination of service, due to the following reasons:
- Death or Disablement
To avail pension, an individual must serve the company for not less than ten years. The amount of pension is based on average emoluments received by the employee, which can be last drawn salary, or the average salary of preceding ten months, years of service, etc.
Key Differences Between Gratuity and Pension
The difference between gratuity and pension can be drawn clearly on the following grounds:
- An after-retirement social security benefit provided to employees by the employer, as a mark of recognition for the services provided by them, is known as a gratuity. Conversely, the pension can be explained as an investment vehicle wherein employer invests a fixed amount to assure payment of definite sum at periodic intervals, to the employee or his/her dependent survivors, after retirement or death.
- Gratuity is nothing but a gift or gratitude given by the employer to the employee, for his contribution to the organisation. As against, the pension is a retirement plan, in which a particular sum is invested by the employer to guarantee payment to the employee after the termination of employment.
- Gratuity involves one-off payment in which the entire sum is provided by the employer at once. Unlike pension wherein, the employee gets a fixed sum in the form of monthly instalments.
- For the entitlement of pension, at least ten years of contributory service is required. On the other extreme, to become eligible for gratuity, a person needs to work for a minimum of 5 years with the same organisation.
Gratuity and Pension are the two benefits that are offered to the employees by the employer, at the time of termination of employment, due to retirement or superannuation, to help the employee combat the situation in which the earnings in the form of salary is stopped or reduced. Even at the time of the death of the employee, it ensures the highly needed financial assistance to the family members.
The amount of pension and gratuity differs from member to member, on the basis of their salary and years of service.
It’s more explanatory. Thanks
phillip Nkhoswe says
I thank you for the information. Please keep on updating me on an change that can happen.
Carole Thorne says
My ex husband divorced me 3 years ago. He was in the army for over 35 years. He will receive a gratuity when he is 65 years old which is November 2020.
We were married for 33 years whilst he was a serving solider.
Am I entitled to half or a portion of his gratuity?
Bobby Goreja says
You have missed out on the ‘ taxability’ aspect of gratutity and pension income.
Hope, you add these points soon.
Otherwise, brings out the differences very well.
Good work !