What is Gratuity?
Gratuity is a statutory benefit
provided by employers to employees
as a token of appreciation for their
continuous service. It is a lump-sum
amount paid to an employee at the
time of retirement, resignation, or
termination, as long as they have
completed at least five years of
continuous service with the
organization. The ‘Payment of
Gratuity’ Act was assembled by the
Indian Parliament on August 21,
1972, and implemented on September
16, 1972.
Industries
and Establishments:
This includes factories, oilfields,
mines, railways, ports, and
plantations.
Shops and
Businesses: Any shop or
business that employed 10 or more
people in the last 12
months.
Other
Organizations: Any
other type of establishment with 10
or more employees at any point
during the previous year.
What are the Eligibility Criteria to Receive Gratuity?
For an employee to be eligible for gratuity, they must meet these requirements:
Minimum Continuous Service
The employee must have completed at least five years of continuous service with the organization. Exceptions apply in cases of death or disability, where the five-year rule is waived.
Employment Type
The employee should be working under
a formal employer-employee
relationship, which typically
includes both full-time and
part-time employees, as long as they
meet the continuous service
requirement.
Applicable
Establishments
Gratuity applies
to organizations such
as:
Factories, mines,
oilfields, ports, plantations, and
railways.
Shops or businesses
with 10 or more employees in the
past 12 months.
Separation from Employment
Gratuity payment is done when the employee leaves the organization due to:
- Retirement
- Resignation or Termination
- Death or Disability (the five-year rule is waived).
These criteria ensure gratuity serves as a reward for loyalty and service continuity.
How to Calculate Gratuity?
The method of calculating gratuity depends on the act that applies and has the following characteristics.
- Calculation of gratuity for those employees who are entitled under the Payment of Gratuity Act 1972.
- Calculation of gratuity for those employees who are not entitled under the Payment of Gratuity Act 1972.
Gratuity is calculated for employees who are entitled under the Payment of Gratuity Act 1972, using the following gratuity calculation formula:
Gratuity = (15 / 26) × Last Drawn Salary × Years of Service
Here’s what each term
means:
Last Drawn
Salary: This includes
the basic pay and any dearness
allowance (if
applicable).
15/26
Factor: Represents 15
working days of gratuity for every
completed year of service,
calculated based on 26 working days
in a month.
Years of
Service: The total
number of years the employee has
worked for the organization. For
calculation purposes, any period
over six months is rounded up to a
full year, while less than six
months is ignored.
Example
Calculation:
Last
Drawn Salary: ₹50,000
Years of
Service: 10 years
Gratuity
Calculation:
Gratuity= 15 / 26
×50,000 × 10 =
₹288,461.54
Important
Notes:
Gratuity is
limited to ₹20 lakh for employees
who fall under the Payment of
Gratuity Act, 1972.
The formula
may vary slightly for establishments
not covered under the Act.
Gratuity is calculated for employees who are not entitled under the Payment of Gratuity Act 1972, using the following formula:
Organizations that are not bound by the Act may still offer gratuity as a goodwill gesture, following their internal policies. The calculation differs slightly:
Gratuity = (½) × Last Drawn Salary × Years of Service
Explanation:
Last Drawn
Salary: Includes only
the basic salary (and possibly
dearness allowance, depending on the
employer’s policy).
½
Factor: Represents half
a month’s salary for every completed
year of service.
Years
of Service: Total years
worked are considered. The rounding
of service years depends on the
employer’s
discretion.
Example
Calculation:
Last
Drawn Salary: ₹40,000
Years of
Service: 8 years
Gratuity
Calculation:
Gratuity= ½ ×
40,000×8 = ₹1, 60,000
The above are the gratuity formulae to calculate gratuity in different cases.
What is a Gratuity Calculator?
A Gratuity Calculator is a tool that quickly calculates the gratuity amount an employee is entitled to, based on their salary and years of service. It uses a formula to estimate the gratuity an employee is entitled to upon leaving their job. It is especially useful for small business owners and employees who want to get an estimate of their gratuity payments.
What are the Benefits of using a Gratuity Calculator?
The Gratuity Calculator is advantageous for both the employee and the employer. Some of the top benefits it brings are:
Accurate Calculations
Usually, gratuity calculations are a little complex so, the calculator makes sure the gratuity is right based on how long someone worked and their pay, avoiding mistakes and making sure it’s done right.
Saves Time
Manually calculating gratuity for employees with long service and complex salaries is time-consuming. A calculator saves time by reducing errors and minimizing manual effort.
Clear and Easy to Understand
Employees can easily see how their gratuity is figured, making it easier to trust and understand everything between them and the employer.
Helps Follow the Law
Gratuity calculators are created to
make sure businesses comply with
local laws. This reduces the chances
of legal problems, such as lawsuits
or penalties for not following the
correct procedures.
But the
amount it comes up with is only an
estimate. The final payment gratuity
isn’t always the same because it can
be influenced by laws, company
rules, and state regulations.
What are the Taxation Rules for Gratuity Payment?
If you’re wondering what gratuity tax means, it refers to the tax applied to the gratuity amount an employee receives after leaving a job, depending on the applicable tax laws.
| Category | Taxability of Gratuity | Exempt Amount |
|---|---|---|
|
Government
Employees
|
Fully
Exempt
|
Not
Applicable
|
|
Non-Government
Employees
(Covered
under
the
Payment
of
Gratuity
Act,
1972)
|
Exempt
up to
the
least of
the
following:
|
1.
₹20,
00,000
(lifetime
limit). |
|
Non-Government
Employees
(Not
Covered
under
the
Payment
of
Gratuity
Act,
1972)
|
Exempt
up to
the
least of
the
following:
|
1. A
maximum
limit
of
₹20
lakhs,
which
was
increased
from
₹10
lakhs
following
a
recent
amendment. |
|
Others
(e.g.,
employees
receiving
gratuity
from
private
funds or
in
unauthorized
cases)
|
Fully-taxable
|
Not
Applicable
|
Source: Cleartax
Who is Exempt from Receiving Gratuity in India?
- Gratuity received by government employees (both State and Central), defense personnel, and employees of local authorities upon retirement, superannuation, or termination is completely exempt from tax according to current gratuity laws.
- The tax exemptions on the gratuity of employees in the private sector depend on whether they come under the Payment of Gratuity Act, of 1972. The tax treatment varies based on this factor.
What is Gratuity Nomination?
A gratuity nomination is when an employee selects a person to receive their gratuity after they pass away. The employee fills out Form F and gives it to the employer. Employees can also revise or update their nominations at any time during their employment.
What Does Compulsory Insurance Mean for Gratuity?
Under the Payment of Gratuity Act, of 1972, all private employers covered by the law must get insurance to cover gratuity payments. If an employer does not follow this rule or fails to pay the insurance premiums they are subject to legal action. Failure to do so leads to a penalty of ₹10,000, plus ₹1,000 for each day the contravention continues.
Frequently Asked Questions
An employee must complete five years of continuous service with the same employer to be eligible for gratuity.
In some organizations, gratuity is shown as part of the employee’s CTC, but it is not part of the monthly salary. It’s provided as a lump sum upon leaving the company.
No, gratuity is only payable when the employment relationship ends due to resignation, retirement, termination, death, or disability. It cannot be withdrawn during active employment.
Employees face a few usual problems with gratuity, such as unclear calculations, delayed payments, and uncertainty about their benefits.
Yes, every country has its own laws that define eligibility, how gratuity is calculated, and when it should be paid.
In case of failure of an employer to pay gratuity, the employee can present their grievances to the Labour Commissioner or seek legal redress. The employer may suffer penalties and be in a position to pay interest on the delayed sum. The employees should also have records to support their claims.
