Payment of Gratuity in India – Eligibility, formula, taxability + calculator

Hello and Welcome. In this post, we will discuss all about the payment of Gratuity in India.

We will cover the following topics:

• • What is Gratuity?
  • Gratuity and its applicability
  • Eligibility for Gratuity in India
  • Gratuity formula
  • Gratuity payment
  • Is Gratuity taxable?
  • Forfeiture
  • Calculation of gratuity in case of employee’s death
  • FAQs

 

What is gratuity?

An organization gives gratuity as a kind of monetary / loyalty benefit to its employees who have worked in the same organization for 5 or more years.

As per the Payment of Gratuity Act (1972), the organisation should provide this mandatory benefit to give recognition for employee’s years of service.

This gratuity benefit is generally for the employees who leave the organization, and it is mostly given at the time of his/her retirement. It can also be paid before under certain conditions.

The employer pays the full amount and no amount is deducted from the employee’s salary for gratuity.

Gratuity and its applicability

As per the Payment of Gratuity Act, the scheme for the payment of gratuity is applicable for:

• Factories
• mines
• oil fields
• plantations
• ports
• railway companies
• shops or other establishments.

In general, an employee is covered under the Act if the organisation has at least 10 employees at any given time in the preceding 12 months.

And once an organisation comes under the Act, it will always remain covered even if the number of employees comes below 10.

Eligibility for Gratuity in India

An employee is eligible to get gratuity under the following circumstances:

• An employee retires after completing 5 years of continuous service with the same organization.
• If an employee resigns after 5 years of working with the same organization.
• Temporary staffs, contract workers are also eligible if they are considered as employees in the company.
• When an employee is transferred overseas on an assignment, then he / she is eligible for gratuity.
• An employee who passes away / suffers disability due to illness or an accident.

Gratuity formula

Gratuity amount mainly depends on two factors:

• Last drawn salary of the employee
• Years of service of the employee

In India, the formula for calculating gratuity is given below:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service

Example: Imagine that you worked with company A for 15 years. Your last drawn basic salary along with dearness allowance was Rs 30,000. Hence, the amount of gratuity will be = 15*30000*15 / 26 = Rs 2,59,615.

You can find the link to our Gratuity calculator here.

Notes:

• The ratio 15 / 26 represents 15 days out of 26 working days in a month i.e., An average of 30 days reduced by 4 Sundays is considered for calculation.
• Last drawn salary = Basic Salary + Dearness Allowance i.e., Basic + DA. Here we do not consider gross salary or net salary.
• So, years of service are rounded to the nearest full year. For e.g., If the employee has a total service of 20 years, 10 months and 25 days, then you will receive the gratuity for 21 years.
• If an employee has a total service of 20 years, 1 month and 25 days, then the no. of years will be 20 years.
• The amount of gratuity cannot exceed Rs. 20 lakhs. If it exceeds then it will come under as ex-gratia.

Gratuity payment

The employer will have to pay the gratuity amount within 30 days from the date it is billed to the employee.

If not he needs to pay simple interest on it starting from the actual date of payment. The rate will not be more than the government-stipulated rate.

According to the payee’s desire, it can be paid in cash or by DD or check to the eligible employee, nominee, or legal heir.

Is Gratuity Taxable?

Yes. If the Gratuity amount exceeds Rs. 20 Lakh then it is taxable. The taxable amount will be added to the total income under the “others” category. So the tax is calculated based on the income tax slab rate.

For e.g., If a person gets the gratuity of Rs. 15,25,742, then this amount is not taxable.

If a person gets the gratuity of Rs. 25,25,742, then, the exemption will only be for Rs. 20 and Rs. 5,25,742 is taxable.

Forfeiture

The conditions that make an employee ineligible of his/her gratuity amount:

• For his / her lawless or disorderly conduct or any other act of violence on his or her part.
• For any involvement in any offensive act during his/her employment period.

Calculation of gratuity in case of employee’s death

As per the Gratuity Act, the gratuity is payable up to the date of death of the employee, irrespective of whether five-years period was completed or not. There are the details of the rate at which gratuity will be payable. 

Tenure of employment	Gratuity payable
Less than a year	Basis salary*2
1 year or more than but less than 5 years	Basic salary*6
5 or more than 5 years but less than 11 years	Basic salary*12
11 or more than 11 years but less than 20 years	Basic salary*20
20 or more than 20 years	Half of the basic salary for each completed period of 6 month. But, this is the subject to a maximum of 33 times of the basic salary.

FAQs on payment of gratuity

• How can I nominate someone to receive the gratuity amount after my death?

To nominate someone for your gratuity amount, you need to fill out form F, when you join the organization.

• Are there any gratuity benefits for contract employees? If the employee will retire or resign after 5 years.

Yes, if you are under a contract and separate from the company, then the gratuity amount needs to come from the contractor not from the company. If you are on the company rolls and you are considered an employee in the company, then you will get the gratuity. 

• If I resign from the company before 5 years, will I be eligible for a gratuity amount?

NO, before 5 years, you will not be eligible for a gratuity amount. For a gratuity amount, you have to serve a minimum of 5 years in the organisation, or you have to complete 240 days of your service in 5 years, then you can avail gratuity.

This ends our post on Gratuity in India. Also, if you have any doubts or queries kindly drop them in the comment section below.

Related:

• Payment of Bonus Act
• Gratuity increased to 20 lakhs

You can also see how it works in Saral Paypack click on the link below:

• Gratuity Projection and Gratuity Calculation

Calculate gratuity, leave encashment and generate full and final settlement on employee leaving with Saral PayPack.

Check out more features of Saral PayPack Payroll software.