What is Gratuity?

Gratuity is the amount usually given by the employer to the employee at the time of retirement for the services rendered by him during the period of employment. It can also be paid before if the same is specified in the terms & conditions. In order to claim gratuity, an employee should complete 5 years of service in an organization. It can be paid before 5 years only in case of death of an employee or disability or illness.

What is Gratuity?

Gratuity Rules & Regulations

As per Gratuity act 1972, every employee needs to work in an organization for at least 5 years in order to get eligible for gratuity. The employer entitled to receive gratuity amount only on his or her retirement, superannuation or resignation. However, there are some exceptions to it. The gratuity amount can be paid before 5 years to the employee or to his or her nominee in the case of disablement or death of an employee. In such cases, number of years is not taken into consideration.

This rule states that you need to apply within 30 days from the date it becomes payable. Therefore, application must be made before 30 days from the date of superannuation or retirement. In case it gets delayed due to a valid reason, you can apply after the expiry date of superannuation or retirement.

Gratuity Act, 1972

According to Gratuity act 1972, all employees working in factories, mines, oil fields, plantations, companies, ports and other establishments are eligible for gratuity in case the company is having more than 10 employees. It is different from provident fund and totally paid by the employer to the employee without taking any monthly contribution from him.

Payment of Gratuity Act, 1972

As per The Payment of Gratuity Act 1972, there are certain rules that need to be followed at the time of payment of gratuity, such as:

  1. If as an employee you are entitled to certain amount of gratuity, you can apply for the same within 30 days from the date it becomes payable and if you have planned your resignation or retirement date or superannuation and know the date in advance, then also you need to apply for the gratuity 30 days in advance. However, even if your application is received after the expiry of 30 days and the reasons for the delay are valid, the employer cannot reject your application and in case the employer rejects the application for any reason, he needs to mention the same.
  2. Once the application is received, the employer need to specify the amount payable and the date on which payment will be made within 15 days of receipt of application.
  3. In case the claimant is the nominee or the legal heir, he might need to submit the evidence or produce a witness to establish his identity and genuinity of his claim and in this case, the application is accepted by the employer from the date the witness or evidence is produced by the claimant.
  4. The payable gratuity can be made either in cash, demand draft or by cheque.

Eligibility Criteria for Receiving Gratuity

Gratuity can be received by an employee in the following situations –

  1. If the employee is eligible for superannuation
  2. If the employee is retired
  3. If the employee resigned after completing 5 years of services in the same organization
  4. If the employee become disable due to illness or an accident.
  5. If the employee dies.

How to Calculate Gratuity?

Gratuity Calculation Formula

It is very important to know the gratuity formula before we calculate the gratuity amount. The amount of gratuity depends upon number of years employee served in an organization.

Gratuity – N*B*15/26

Where, N denotes number of years served by the employee in an organization

B denotes last drawn basic salary plus DA

Calculation of Gratuity for the Employees Covered Under the Act

Let us take an example to understand the calculation of gratuity for the employees covered under the act. If the last drawn salary of Ramesh is Rs.50000 per month and he served the organization for 20 years 9 months, the gratuity amount will be –

21*50000*15/26 = Rs.605769

Note - Total tenure of 20 years 9 months is considered as 21 years as Ramesh worked for more than 6 months in a year.

Calculation of Gratuity for the Employees not Covered under the Act

Employers can pay gratuity to their employee’s even if the organization is not covered under the gratuity act.

Gratuity = N*B*15/30

Let us take an example to understand the calculation of gratuity for the employees not covered under this act. If the last drawn salary of Sonam is Rs.60000 per month and she served the organization for 20 years 9 months, the gratuity amount will be –

20*60000*15/30 = Rs.600000

Note - Total tenure of 20 years 9 months is considered as 20 years in this case

Calculation of Gratuity in Case of Death of an Employee

In case of death of an employee, the amount of gratuity depends upon the length of the service of the employee; the maximum benefit is restricted to Rs.20 Lakhs. How much amount an individual family member or nominee will get after the death of an employee are listed in the table below –

S.no Qualifying Service Rate
1 Less than one year of service 2 times of basic pay
2 One year or more but less than 5 years of service 6 times of basic pay
3 5 years or more but less than 11 years 12 times of basic pay
4 11 years or more but less than 20 years 20 times of basic pay
5 20 years or more Half of salary on every 6 months completion subject to maximum of 33 times

Tax Exemptions on Gratuity for Government & Private Employees

Government offers tax exemptions on the amount of gratuity received by an employee as per the specified conditions. Even the amount received by the nominee on the death of the employee is liable to be taxed and comes under the heading “Income from other sources”.

Tax Exemptions on Gratuity Received by Government Employees

As per existing laws, amount of gratuity received by government employees on their retirement, termination or superannuation is exempted from tax. This rule is applicable for both state & central government employees. It is also applicable on employees of defense sector and those working in any local authority.

Tax Exemptions on Gratuity Received by Private Sector Employees

Private sector employees who come under the payment gratuity act are eligible for the exemption.

  • Private sector employees covered under this act

    The gratuity amount received by the employees covered under this act is not liable to pay tax as per specified conditions. The least of the following 3 possibilities are exempt from the following -

    • Actual Gratuity received, or
    • Gratuity amount of Rs.10 Lakhs, or
    • Salary equivalent to 15 days of service for each year completed.

    In case the amount of gratuity exceeds the specified exemption limit, it will be taxed as per specified conditions.

  • Private sector employees not covered under this act

    Employees who do not comes under the payment of gratuity act are also eligible for certain exemptions as per the specified conditions being the least of the following –

    • Actual gratuity received, or
    • Gratuity amount of Rs.10 Lakhs, or
    • Amount equivalent to half month salary for each year of service

    In case the amount of gratuity exceeds the minimum specified exemption limit, it will be taxed as per specified conditions.

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