Calculation of Gratuity in Nigeria

Employers commonly offer additional rewards to their workers beyond their salary, such as gratuity and pension, as a form of recognition for their dedicated service. However, not all organizations provide these benefits, and eligibility criteria must be met by employees to receive them. 

In this post, we will focus on gratuity, which is a payment made to employees upon resignation or retirement to acknowledge their service and contributions. Many Nigerian employees are unaware of the amount of gratuity they are entitled to receive.

Also, check out the Standards Organization of Nigeria.

This post aims to provide valuable information on gratuity calculation in Nigeria alongside other tangible information.  

What is Gratuity?

Gratuity is the amount of money paid to an employee after the period of working in an establishment. It may be a small amount of money or otherwise depending on the years of service and other factors.

The fee is an appreciation of the service rendered by the employee for the period during which they work with the organization. For sake of clarification, not all institutions pay gratuities, however, public institutions pay gratuities while we have few private institutions doing so. 

Paying gratuities is not obligatory for an institution to pay but they are bound by the law (Pension Reform Act 2014) if they have a contract agreement with their employee. Therefore, employees must ensure to know the terms and conditions surrounding their appointment during salary negotiation.  

However, paying gratuities to employees is essential for the following reasons 

• Appreciation of Value: Promising and paying gratuities to employees is a move to show you value their contributions to the growth of your organization.
• Support their future endeavor: Gratuity is a means of helping the employee settle in the future especially when they are retired. 

Gratuity Calculation in Nigeria

The laws binding the payment for gratuities are different from one country to the other and so also the formula for the calculator of gratuity in Nigeria. Furthermore, we will restrict ourselves to the mode of determination of gratuities for employees in Nigeria.

However, before we will give the formula for gratuity calculation, we need to make it clear the criteria concerning the eligibility for gratuity payment and the factors affecting the gratuity calculation in Nigeria. 

Eligibility for gratuity payment in Nigeria

There are certain criteria that an establishment whether public or private use to determine the amount to be paid for the gratuity. Although all the criteria are not the same in all countries and even all institutions, some common criteria are considered to determine eligibility. The common criteria include:

Having served the employer for the required minimum amount of time

To be eligible for gratuity payments, an employee must have worked for the employer for the required minimum amount of time, typically five years or more.

Retirement or resignation-related termination of employment

To be eligible for gratuity payments, the employee must have retired from their position or given their notice of resignation.

Termination of employment due to death or disability

If the employee passes away or becomes disabled while on the job, the gratuity sum may be given to the nominee or the employee’s legal heir in some countries.

Payment of gratuities by employment agreements: In some situations, the provisions of an employment agreement may specify who is eligible to receive gratuity payments.

Also, check out Computer Professional Bodies in Nigeria.

Factors that Affect Gratuity Calculation in Nigeria

Furthermore, some factors will affect the amount of the gratuity to be paid to you as an employee. The factors include the following

Service duration

The length of the service is important for determining the gratuity. The amount of the gratuity is based on how long the employee has been employed by the business.

Base wage

Another crucial element in determining gratuity is the employee’s base pay. The amount of gratuity that will be paid increases in direct proportion to the basic income.

Contribution of the employer

In Nigeria, employers are mandated to set aside a specific portion of an employee’s base pay for a pension plan. The entire amount of contributions made by the employer on behalf of the employee is typically used to determine how much gratuity will be paid.

Age at which one may retire

An employee’s retirement age is taken into account while determining their gratuity. In Nigeria, the retirement age is 65 for university professors and 60 for state employees. If an employee leaves their position before the required retirement age, their gratuity may be reduced.

Pension plan

The kind of pension plan an employee is enrolled in may have an impact on how much gratuity is paid. When compared to employees who are registered in non-contributory pension plans, contributory pension plan participants are more likely to earn a bigger gratuity.

The contribution years

The computation of gratuity is also impacted by how long an employee has made pension contributions. The longer an employee has worked, the more the higher the amount of gratuity that will be paid.

The formula for calculating gratuity in Nigeria 

When an employee has accrued a particular number of years of service, their employer will pay them a lump amount as a retirement benefit known as a gratuity. In Nigeria, gratuities are calculated using the following formula:

Gratuity is calculated as follows: (Basic wage + Dearness Allowance) x Years of Service x 15/26

The basic wage used in this calculation is the employee’s set monthly salary, while the dearness allowance is an extra sum given to workers to help them deal with inflation.

The term “years of service” refers to the length of time an employee has worked for an employer, and in Nigeria, the gratuity is determined using the constant formula 15/26.

Here’s an example of how to calculate gratuity in Nigeria:

Assume an employee has a basic salary of 50,000 Naira per month and a dearness allowance of 10,000 Naira per month. The employee has worked for the company for 20 years. Using the formula above, the gratuity would be calculated as follows:

• Gratuity = (50,000 + 10,000) x 20 x 15/26
• Gratuity = 60,000 x 20 x 15/26
• Gratuity = 1,846,154 Naira

Therefore, the employee would be entitled to a gratuity of 1,846,154 Naira. It’s important to note that the calculation of gratuity may vary depending on the employer’s policy and the terms of the employee’s contract.

Conclusion

Gratuity is a valuable perk that gives retirees financial security. To guarantee that you are paid correctly as an employee, it is crucial to understand how gratuity is calculated in Nigeria.

You may calculate your gratuity precisely and prevent any misunderstandings with your employer by following the detailed instructions provided in this blog post.

Before you go, check out All You Need to Know about Chartered Accountancy.