Every employee seeks and deserves to be looked after they complete a long term of service towards the industry and country’s economy. This is why, they receive retirement benefits in the form of a few schemes, so that they may be self sufficient and economically independent to live dignified lives. While a few schemes may require the employee to contribute in part along with the company, others are given completely by the organisation upon retirement. Pension and gratuity are two such retirement benefits.

Definitions and meanings

Definition of Pension:

The term pension refers to a monthly installment paid to an employee upon retirement. It is a benefit provided by the employer that can be a government establishment or any other organisation to the ex-employee or his dependent relatives on a perpetual basis. Pension payments become effective for employees who have served the same organisation for at least 10 years. The amount of pension is decided taking into consideration the average emoluments of an employee, which could be either the last drawn salary or the average salary of 10 months preceding retirement, etc. Pension becomes payable upon the retirement, superannuation, death or disablement of an employee.

Definition of Gratuity:

Gratuity is the sum of money that an ex employee receives as a form of gratitude for his contribution towards the organisation. It is a form of social security benefit provided by the employer of an establishment to the retiring employee as a token of recognition when they retire or leave the organisation. To be eligible for gratuity, a person must complete at least 5 years of service at the same organisation. The 5 years of service condition is not applicable in the case of death or disablement of the employee as a result of an accident or disease. This is payable upon the retirement, superannuation, death or resignation of an employee. The amount of gratuity payable is given to the employee upon leaving the establishment but in case of death, is handed over to the nominee of the employee. If there is no nominee, the same is given to the legal heir in accordance of the law.

Differences between pension and gratuity:

The main points of difference between pension and gratuity are given below:

1. Meaning:

Pension is a retirement scheme that is provided to a retired employee. The scheme requires contribution from the employer during the employee’s years of service and is paid in periodic installments to the employee from the time of retirement. Gratuity is a lump sum payment made to a retiring employee by the organisation as a token of gratitude for their years of service.

2. Nature:

While pension is a retirement scheme, gratuity is a gift.

3. Governing Act:

Pension is governed by the employees’ pension (amendment) Scheme, 2017, which formerly was known as the employees’ pension scheme, 1955. Gratuity comes under the purview of the payment of gratuity act, 1972.

4. Method of Payment:

Pension is paid on installment basis (monthly) whereas gratuity is a lump sum payment.

5. Minimum Years of Service:

An employee needs to serve for at least 10 years in the same organisation in order to be eligible for the pension scheme and  at least 5 years to be able to avail gratuity.

6. Term:

While pension is a payment to be made by the organisation perpetually to the employee or his dependents, gratuity is a one time payment made to the employee as soon as they retire.

Pension versus gratuity – tabular comparison

Pension vs Gratuity
Retirement plan Gift
Governed By
Employees’ pension (amendment) Scheme, 2017 Payment of gratuity act, 1972
Method of payment
Monthly installments Lump sum payment
Minimum years of service
Minimum contributory service of 10 years. Minimum contributory service of 5 years.
Perpetual One time