Gratuity means payment of a lump sum amount to an employee after a certain length of service. It is paid as a reward for long service rendered. Gratuity can be paid at the time of retirement but can also be paid if you move jobs after a certain length of service (5 years).
Gratuity Rules in India
Gratuity rules in India apply to both employees covered by the Payment of Gratuity Act, 1972 and also 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.
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 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 eligibility for gratuity under existing Gratuity Act rules.
Under existing gratuity rules, employees are only eligible for gratuity under the Payment of Gratuity Act, 1972 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.|
Employee(s) who leaves service due to termination of his 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.
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 receivable at the time of retirement/leaving your job after continuous years of service, the actual pay out may vary based on other factors. In the following section, we will discuss the formula for calculating gratuity.
Gratuity Calculator Formula
The formula for gratuity under the Payment of Gratuity Act, 1972 is 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.
Gratuity Calculation Example
The Payment of Gratuity Act states that gratuity payment should be equal to 15 days wages for every completed year of continuous service, based on the last drawn salary. For example, if you joined service in 2013 and resigned in 2018 on a monthly salary of Rs 60,000 (in 2018), your gratuity will be calculated as follows: (15/26* Rs 60,000)*5 = Rs 1.73 lakh and this entire gratuity payment will tax free.
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 of 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 or
- Total Gratuity Due under the Act or
- Tax-free Gratuity Limit of Rs 20 lakh
Any gratuity payment received by a tax assesse in excess of the above will be taxed as per the slab rate of the assesse.
Taxation of Gratuity not under Gratuity Act
The tax-free gratuity formula for employees not covered by the Payment of Gratuity Act is similar but not exactly the same. The tax-free gratuity formula for employees not covered by the Payment of Gratuity Act is the minimum of: Gratuity Paid, Gratuity payment as per the formula mentioned earlier and Rs. 10 lakh.
Under existing rules, gratuity payments received by government employees is not covered under the Gratuity Act, 1972. What’s more, the gratuity pay-out in this case is not taxable irrespective of the amount paid out as gratuity.
How to Download 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.