Gratuity is a lump-sum payment an employer gives an employee at the end of their service, usually on retirement or after a set number of years, as a reward for long service.
The first thing to know: in Nigeria's private sector, gratuity is generally not a legal requirement. It only becomes an obligation if it's promised in the employment contract, a staff handbook, a collective agreement, or an established company scheme. That's different from pension, which is mandatory by law (8% employee + 10% employer) once you have 3 or more employees. Gratuity is the older tradition; the contributory pension scheme under PenCom is the statutory system that largely replaced it.
Where gratuity exists, the formula is whatever the scheme says, a common pattern is a multiple of final monthly (or annual) salary per year of service, often with a minimum qualifying period like 5 or 10 years.
Nigerian example: a manufacturing company's handbook promises one month's basic salary per completed year of service, payable after 10 years. When Mr Adebayo retires after 15 years on a final basic salary of ₦200,000/month, his gratuity is 15 × ₦200,000 = ₦3,000,000, paid as a lump sum alongside his pension entitlements.
On tax: gratuities have historically enjoyed favourable treatment under Nigerian income tax law, but confirm the current position under the Nigeria Tax Act 2025 with a tax professional before paying one out, don't assume.
For the mandatory retirement system, see PenCom; for everything payroll must deduct today, see statutory deductions in Nigeria.