Gratuity is a significant component of employee benefits in India, serving as a token of gratitude from employers to employees for their long-term service. This guide will help you understand everything you need to know about gratuity, from eligibility to calculation methods and tax implications.
What is Gratuity?
Gratuity is a mandatory monetary benefit that employers must provide to employees who have rendered continuous service for at least five years. It is governed by the Payment of Gratuity Act, 1972, which applies to establishments employing 10 or more persons.
Eligibility Criteria
To be eligible for gratuity, an employee must meet the following conditions:
- Must have completed at least 5 years of continuous service with the same employer
- In case of death or disability, the 5-year rule is waived
- The service period includes authorized leaves and breaks between working days
Note: For calculating 5 years, even if an employee has worked for 4 years and 240 days in the fifth year, they become eligible for gratuity.
Calculation of Gratuity
The formula for calculating gratuity is:
Gratuity = (15 × Last drawn monthly salary × Number of completed years of service) ÷ 26
Where:
- Monthly salary includes basic salary and dearness allowance
- 15 represents 15 days of salary
- 26 represents the number of working days in a month
Example 1: Basic Calculation: Let's say an employee:
- Has worked for 7 years
- Last drawn basic salary: ₹30,000
- Dearness allowance: ₹5,000
- Monthly salary = ₹35,000
- Gratuity = (15 × 35,000 × 7) ÷ 26 = ₹1,41,346
Example 2: Early Retirement: For an employee who:
- Has worked for 5 years and 7 months
- Last drawn basic salary: ₹40,000
- No dearness allowance
- Note: Only completed years are considered, so 5 years will be taken for calculation.
- Gratuity = (15 × 40,000 × 5) ÷ 26 = ₹1,15,385
Tax Implications
Gratuity received by employees is exempt from tax under certain conditions:
- For government employees: Entire gratuity amount is tax-exempt
- For non-government employees covered under the Gratuity Act: Minimum of the following is exempt, This rule means that your tax-free gratuity amount will be the lowest of these three values:
- Actual gratuity received
- ₹20 lakhs (the maximum limit set by government)
- The calculated amount using the formula: (15 × last drawn salary × completed years of service) ÷ 26
Example 3: Tax Calculation: An employee receives ₹25 lakhs as gratuity:
- Amount eligible for exemption: ₹20 lakhs
- Taxable amount: ₹5 lakhs (25 lakhs - 20 lakhs)
Special Cases
Resignation before 5 years:
- No gratuity is payable
- Exception: If resignation is due to disability or death
Termination for misconduct:
- Employer can forfeit gratuity
- Written notice must be given to employee
Death of employee:
- Gratuity is paid to nominated family members
- 5-year service requirement is waived
How to Claim Gratuity
- Submit Form-I to employer within 30 days of eligibility
- Employer must pay within 30 days of application
- Delayed payment attracts interest at 10% per annum
Important Points to Remember
- Keep service records and salary slips safe
- Update nomination details regularly
- Gratuity amount cannot be attached by court order
- Maximum gratuity limit is ₹20 lakhs
- Interest is payable on delayed gratuity payments
Legal Recourse
If an employer fails to pay gratuity:
- File complaint with Controlling Authority
- Appeal must be made within 60 days
- Authority can impose penalty up to ₹20,000
Gratuity Calculator
To estimate your gratuity, follow these steps:
- Note your current basic salary and dearness allowance
- Count completed years of service
- Apply the formula: (15 × monthly salary × years) ÷ 26
Remember that this is a rough calculation, and the final amount may vary based on company policies and other factors.
Gratuity is a valuable retirement benefit that rewards long-term service. Understanding its calculation and implications helps employees plan their finances better and ensure they receive their due benefits. Keep track of your service period and salary components to estimate your gratuity accurately.