In Bangladesh, gratuity acts as a reward for employees for the service they render for a long time. Gratuity is calculated based on the last drawn basic salary and years of service. It is given to ensure employees’ future stability.
Knowing how to calculate it, who is eligible, and the meaning of it helps both employers and employees. For the gratuity calculation in Bangladesh, gratuity rules must be implemented appropriately. Especially, eligibility as well as tax implications concerns. The provisioning and funded gratuity is different.
What Is Gratuity in Bangladesh?
Gratuity is a one-off payment that an employee receives on termination or retirement. It represents the dedication and work of a staff member for the company. Gratuity gives employees very important financial security for the future. Employers are expected to properly understand the gratuity policy in Bangladesh to distribute fair payouts. And they must ensure strict compliance with the law at each step.
What Are the Gratuity Fund Rules in Bangladesh?
Gratuity funds in Bangladesh follow a set of rules. These protect the rights of employees while also aiming at being fair. These are the main points:
- Employees who complete at least five years of service without interruption are eligible for receiving gratuity.
- Gratuity is equal to the amount of monthly basic salary of an employee for every year of service.
- Employers are obliged to properly prepare gratuity payments according to the contract and on time.
- Between the gratuity and compensation, whichever is higher will be paid.
- Gratuity payments are not taxed up to Tk. 2.5 core as per the Income Tax Ordinance 1984.
- The fund is audited for precise and transparent transactions. A special fund under the ascendant plan is generally used for gratuity money.
- Employers must keep separate books for gratuity funds to avoid disputes and guarantee transparency. Gratuity rules in Bangladesh specify fund administration.
Is Gratuity A Taxable Income in Bangladesh?
According to the Income Tax Ordinance 1984 in Bangladesh, gratification payments are usually tax-exempt. Under the directive of the approved funds, payments made of up to BDT 2,500,000 are tax-free. Above this threshold, tips are considered taxable income. Gratuity payments from unapproved funds by NBR are fully taxable, regardless of the amount. However, the distinction between provision & funded gratuity involves very high tax and financial planning consequences for businesses.
Is Gratuity Mandatory in Bangladesh?
No, the Labor Act 2006 does not clearly state that gratuity is compulsory. Employers are not obliged to pay gratuity to employees. But if a company does not maintain a gratuity scheme, it will need to pay compensation under conditions like termination or retrenchment.
How to Calculate Gratuity in Bangladesh?
The formula for gratuity calculation in Bangladesh is:
Last Drawn Basic Salary × Years of Service
According to the labor law of 2006, if the employment period is less than 10 years, the employee will get 30 days of salary for every completed year. If it is above 10 years, he/she will get 45 days of salary for every completed year. However, in cases, where an employee worked a fraction of a year (more than 6 months), he/she will get the payment for a full year of working time according to the Bangladesh Labor Act.
How Is Gratuity Calculated for Private Sector Employees in Bangladesh?
Gratuity calculation for private-sector professionals depends on employment contracts and company policies. And the calculation formula is the same as stated above.
What Is the Difference Between Provisioning and Funded Gratuity in Bangladesh?
Based on financial planning as well as compliance requirements, employers can either opt for provision gratuity payment or funded gratuity payment. Here is an in-depth comparison.
| Aspect | Funded Gratuity | Table header |
|---|---|---|
| Definition | Gratuity amount is recorded as a liability without allocating a specific fund. | A dedicated fund is established to meet gratuity obligations. |
| Payment Source | Paid directly from available cash during retirement or termination. | Payments are made from the pre-allocated gratuity fund. |
| Legal Framework | Falls under basic compliance as per Bangladesh Labor Act 2006. | Often complies with approved fund rules under the Income Tax Ordinance 1984. |
| Compliance Focus | Meets minimum legal requirements but lacks proactive financial planning. | Ensures proactive management of gratuity obligations. |
| Tax Benefits | Limited or no tax relief. | Tax benefits are available for approved funds up to BDT 2,50,00,000. |
| Financial Impact | May cause immediate strain during payouts. | Reduces cash flow stress by spreading costs over time. |
| Risk Management | Higher risk of default during financial challenges. | Provides financial security through pre-funding. |
How Can HR and Payroll Software Simplify Gratuity Calculation in Bangladesh?
HR and payroll software automates and simplifies complex gratuity calculations. It helps to precisely meet predefined gratuity rules in Bangladesh. Gratuity calculation requires employee data of a long period. HR software removes manual recording and automates attendance tracking. Thus, it reduces human errors and ensures accurate gratuity calculation. Adopting such systems improves operational efficiency and lowers administrative burdens.
Final Words
In Bangladesh, providing gratuity is not mandatory by labor laws. But there are specific rules defined for gratuity calculation. This is to ensure the welfare of employees. Modern HR & payroll systems help employers to simplify this calculation. Employers can use these systems to ensure compliance with gratuity regulations, maintain accurate records, and provide timely payments.
