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What is Gratuity Act

What is Gratuity?

Gratuity is the amount that an employer pays his employee, in return for services offered by him to the company.

Eligibility

The employees who have been employed by the company for more than five years are eligible for a gratuity amount. It is governed by the Payment of Gratuity Act, 1972.

Gratuity

The employee can get the gratuity before five years if he/she gets disabled in an accident or due to a disease. Gratuity mainly depends on your last drawn salary and the years of service which are rendered to the Company.

Eligibility Criteria for Gratuity

To receive the gratuity, you must meet the following eligibility criteria:

  1. Must meet eligibility for superannuation.
  2. Must have retired from service.
  3. Must have resigned after continuous employment of five years with the company.
  4. In case of your death, the gratuity is paid to the nominee,
  5. In case of disablement on account of a sickness or an accident, then the gratuity is paid to the nominee.

How to calculate Gratuity?

The Gratuity is calculated based on the following calculation.

Gratuity = n*b*15 / 26

Where n = Tenure of service completed in the company
b = Last drawn basic salary + dearness allowance

For example, you have worked with the ABC company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 40,000. Hence:

The amount of gratuity = 15 * 40,000 * 15 / 26 = Rs 3,46,153

Other Conditions and Eligibility

As per the Gratuity Act, The amount of gratuity cannot be more than Rs 20 lakh.

  • The excess amount would be treated as Ex-gratia.
  • If the number of years you have worked in the last year of employment is more than six months, then it will be rounded to the nearest figure.
  • Let’s say if the tenure of service is 16 years 7 months, then you receive the gratuity for 17 years. Otherwise, it’s for 16 years if it happens to be 16 years 4 months.

For Employee

  1. For employees whose employer is not covered under the Gratuity Act, the gratuity amount would be calculated as per the half-month salary on each completed year of service. The formula is: (15 * Your last drawn salary * the working tenure) / 30. For example, you have a basic salary of Rs 30,000. You have rendered continuous service of 7 years and the employer is not covered under the Gratuity Act.Gratuity Amount = (15 * 30,000 * 7) / 30 = Rs 1,05,000.

What are the Taxation Rules for Gratuity?

The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.

The amount of gratuity received by any government employee if comes under central/state/local authority is exempt from the income tax.

Any other eligible private employee whose employer is covered under the Payment of Gratuity Act. Here, the least of the following three amounts will be exempt from income tax:

    1. Rs 20 lakh.
    2. The actual amount of gratuity received.
    3. The eligible gratuity.

The government has set Rs 20 lakh as the upper tax-free limit.