Gratuity means payment of a lump sum amount to an employee after a certain length of service. It is paid as a reward for the employee’s long service rendered. Gratuity is generally paid at the time of retirement but one can also ask for it while moving jobs after a certain length of service (5 years).
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What is the Gratuity Act?
Gratuity Act is the short name of the Payment of Gratuity Act, 1972 which came into effect in September 1972. The key idea behind the introduction of this Act was to provide monetary benefit to employees who have provided an extended term of service to a single employee. However, while the Gratuity Act applies to industries and organisations all over India, there are some key terms and conditions related to the eligibility for gratuity under existing Gratuity Act rules.
Gratuity rules in India apply to both, the employees covered by the Payment of Gratuity Act, 1972 and also the employees who are not covered by the Payment of Gratuity Act, 1972. Under existing rules for gratuity eligibility, establishments/companies which have 10 or more employees are covered by the Payment of Gratuity Act, 1972. It is, however, notable that Central and State Government employees are not covered by gratuity rules provided by the Payment of Gratuity Act, 1972 and are governed by their own service rules for gratuity payment.
Under the existing gratuity rules, employees are eligible for gratuity only if he/she has completed 5 years of continuous service with a single employer. This condition does not apply if the employee dies or becomes disabled while in service. The following rules apply to the calculation of continuous service under the Payment of Gratuity Act, 1972.
|Continuous Service||Days worked|
|Taken as 1 year of continuous employment||190 days in an establishment that works for less than 6 days in a week or for work in a mine. 240 days in any other case|
|Taken as 6 months of continuous employment||95 days in an establishment that works for less than 6 days in a week or of work in a mine. 120 days in any other case|
|Taken as continuous employment||Not less than 75% of days for which the establishment is open where there is seasonal employment|
|Note: Disablement leave, earned leave and maternity leave are counted as days worked in the calculation mentioned above.|
Calculation of Gratuity
The gratuity under the Payment of Gratuity Act, 1972 is calculated as 15 days’ wages for every completed year of continuous service, based on the last drawn salary. Thus, the gratuity calculator formula as percentage of salary works out to be:
Total Gratuity Payable = (Last Drawn Monthly Salary) x (15/26) x (Number of years of service completed).
For example, if you joined service in 2013 and resigned in 2018 with a monthly salary of Rs. 50,000 (in 2015), your gratuity will be calculated as follows: – (15/26* Rs. 50,000)*5 = Rs. 1,44,230.
Note: Although there are 30/31 days in most months of the year, the number of days in a typical work month specified under the Payment of Gratuity Act, 1972 is 26 days. Thus, 26 days is used in the formula for calculating gratuity. Also, it must be noted that the entire amount of gratuity is tax-free.
The Gratuity Calculator, also known as the Taxable Gratuity Calculator is an easy to use tool that can help you calculate your total gratuity as well as the taxable gratuity amount for the applicable fiscal. While the Online Gratuity Calculator can help you estimate the gratuity to be received at the time of retirement/leaving your job after continuous years of service, the actual payout may vary based on other factors. In the following section, we will discuss the formula for calculating gratuity.
Nomination under Gratuity
Upon completion of one year of service, the employee must make a nomination within 30 days. The nomination shall be made in the name of one of the family members. Any nomination made by an employee in the favor of another person (who is not a member of his/her family) shall be considered void.
In case of death of the nominee before the death of the employee, the interest of the nominee shall revert to the employee. In such cases, the employee shall make a fresh nomination in respect of such interest. To do so, the employee shall use Form F.
Payment of Gratuity by the Employer
An employer must pay the gratuity amount within 30 days from the date when it was billed in favor of the person/employee to whom the gratuity is to be paid.
However, if the employer fails to pay the amount on the specified date, he will be liable to pay simple interest on the similar amount from the date on which gratuity becomes payable at the rate that does not exceed the one stipulated by the government.
It must be noted that the gratuity amount should be paid in cash, only if otherwise the employee/nominee/ legal heir asks for a demand draft or bank cheque.
Payment of Gratuity in case of Death of an Employee
In case of the death of an employee, the gratuity to be paid should be as follows-
|Tenure of the service||Amount to be Paid|
|Less than 1 year||2 times the basic pay|
|More than 1 year and less than 5 years||6 times the basic pay|
|More than 5 years but less than 11 years||12 times the basic pay|
|More than 11 years but less than 20 years||20 times the basic pay|
|More than 20 years||Half of salary for every completed 6 monthly periods subject to a maximum of 33 times of the salary|
Deductions from Gratuity Amount
Employee(s) who leave(s) service due to termination of his/her employment on account of willful negligence, omission, damage or destruction of the employer’s property, etc. will have gratuity pay out reduced by the total value of damage/loss caused. Employers are required to take out an insurance policy from LIC (Life Insurance Corporation) to cover their gratuity liabilities under the Payment of Gratuity Act, 1972.
Forfeiture in Gratuity
The employer is allowed to forfeit the gratuity that must be paid to the employee under certain specific conditions where the employee’s service has been terminated due to any or all of the following reasons-
- His/her lawless act
- Violent behaviour
- Any disorderly conduct
- Any offense involving moral turpitude
*Provided that the offense is committed during the course of the employee’s service
Maximum Gratuity Limit
Gratuity exemption limit is Rs. 20 lakh for all employees covered under the Gratuity Act, 1972. This limit applies over the entire working life of the employee and hence, in case of multiple gratuity payments, the total gratuity exemption limit is maintained at Rs. 20 lakh irrespective of the number of times gratuity pay-out is obtained.
|Type of Employee||Tax-free Gratuity Amount|
|Government Employees||Rs. 20 lakh|
|Employees covered by the Payment of Gratuity Act, 1972|
|Employees covered by the Payment of Gratuity Act, 1972|
Taxation on Gratuity
Gratuity Paid under ‘Payment of Gratuity Act, 1972’
The gratuity taxation formula for employees covered by the Payment of Gratuity Act is calculated after determining the tax-free gratuity amount. The tax-free gratuity amount is the minimum among the following:
- Total Gratuity Paid
- Total Gratuity Due under the Act
- Tax-free Gratuity Limit of Rs. 20 lakh
Any gratuity payment received by a tax assessee in excess of the above will be taxed as per the slab rate of the assessee.
Taxation of Gratuity not under the Gratuity Act
The tax-free gratuity formula for employees who are not covered by the Payment of Gratuity Act is the minimum of the Gratuity Paid. Gratuity payment as per the formula mentioned earlier and Rs. 10 lakh.
Under existing rules, gratuity payments received by government employees are not covered under the Gratuity Act, 1972. Additionally, the gratuity pay-out in this case is not taxable irrespective of the amount paid out as gratuity.
Download the Gratuity Application Form
A gratuity application form can be filled out to receive gratuity by the following:
- The Employee (Form I)
- Designated Nominee of the Employee (Form J)
- Designated Legal Heir of the Employee (Form K)
Once the applicable gratuity application form has been filled out, it needs to be submitted with the appropriate authorities i.e. the employer in order to start the gratuity payment process.
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Ques: When can an employee ask for gratuity?
Ans: An employee can ask his/her employer for the payment of gratuity upon completion of 5 continuous years of service.
Ques: Which salary is considered while calculating gratuity?
Ans: While calculating gratuity, the last drawn salary of the employee is taken into consideration.
Ques: How much amount of gratuity is free from tax liabilities?
Ans: During the entire working career of an employee, the maximum that is exempt from any tax deductions is Rs.20 Lakh
Ques: What is the formula for calculating gratuity?
ns: Gratuity can be calculated using the formula- (15 * last drawn monthly salary * tenure of working) divided by 26; where 26 is taken as the number of working days per month.
Ques: How much percentage of gratuity will I receive monthly?
Ans: An employee can receive a maximum of 57.69% of the monthly salary as gratuity. To know the exact amount of gratuity, you can use the Gratuity calculator.
Ques: Can an employer give excess gratuity to the employee?
Ans: Yes, an employer can give excess gratuity to an employee. However, this excess amount will be a part of the employee’s taxable income.
Ques: Who should I make my nominee if I don’t have a family even after one year of completion of my service?
Ans: If an employee does not have a family at the time of making a nomination, he/she shall make the nomination if favor of any other person; however, if the employee subsequently acquires a family, such nomination shall forthwith become invalid.