FAQ's on Payment of Gratuity

Gratuity is a lump sum amount payable to employees as a reward for their continuous services for 5 years or more. It is calculated on the basis of the salary and tenure of service. In most conditions, it is exempt from income tax. The employer can deny gratuity in case of illegal or immoral acts by the employee.

1) What is Gratuity?
Gratuity is a lump sum amount given to an employee by the employer as a form of recognition of the employee’s long-term service.
Gratuity is mandatory if the employer has 10 or more people in its rolls. And once an organisation comes under the purview of the Gratuity Act, then it will always remain covered even if the number of employees falls below 10.

2) When can employee claim gratuity?
An employee is eligible for it if he/she completes 5 years of continuous service with the employer. 4 years and 240 days onwards is considered as 5 years for gratuity payment. It is given either at the time of resignation or retirement or superannuation or death or disablement.

3) What are the conditions in which my employer can deny gratuity ?
The employer can deny gratuity -
• If the services of the employee are terminated due to unlawful activities like riot or violence.
• If the services of the employee are terminated due to morally wrong acts done by an employee during the course of employment.

4) How is gratuity calculated?
Gratuity is calculated on salary and tenure. The formula to get the amount is -

Salary * Tenure *15/26; upto a maximum amount of Rs. 20 Lakhs

where,

  • Salary = Current Basic Pay + Dearness Allowance
  • Tenure = Number of years of service.

If you have worked for six months or more in a year, it is considered as one year for gratuity calculation. If you have worked less than 6 months in a year, that year is ignored.

  • 26 = Number of working days in a month (whether your company has a 5 day working week or 6 day working week)

  • 15 = 15 days salary is considered.

5) What are the taxation rules related to gratuity?

Taxation rules differ depending on the employee’s work -

a) Gratuity received by a person working in a department of the state government or central government is fully exempt from income tax.

b) Gratuity received by a person working with an non-government employer covered under Payment of Gratuity Act is exempt from tax to the extent of the least of the following -
• Actual gratuity received;
• Rs 20,00,000;
• 15/26 * salary for each completed year of service

c) Gratuity received by a person working with an non-government employer not covered under Payment of Gratuity Act is exempt from tax for the least of the following
• Half month’s average salary for each completed year of service
• Rs. 20,00,000
• Actual gratuity received

6) Who can receive gratuity?
A person working as an employee in any company, shop, manufacturing unit, agricultural business or service industry is eligible to receive gratuity as per the conditions of gratuity. An apprentice is not eligible for gratuity.

7) What else should employee know about Gratuity?
• If an employee is disabled or dies when he/she is in service, the 5 year rule is not applicable. The gratuity amount is given to the nominee or legal heirs
Qualifying service vs Rate
Less than one year - 2 times of basic pay
One year or more but less than 5 years - 6 times of basic pay
5 years or more but less than 11 years - 12 times of basic pay
11 years or more but less than 20 years - 20 times of basic pay
20 years or more - Half of emoluments (salary) for every completed 6 monthly period subject to maximum of 33 times of emoluments

• If the employee contributes to a loss for the employer, he can be denied gratuity.
• If the employer’s work is of a seasonal nature, the gratuity shall be seven days wages per season.
• An employer can give gratuity greater than the amount specified by the government.
• You will get the gratuity along with the final settlement of dues. It should be given to the employee within 30 days of fulfilling the conditions

6 Likes

Thanks @Ankit

Very elaborative.

3 Likes

Dear @Ankit,

  1. Can employer give more Gratuity than what formula mentions. E.g. if as per the formula Gratuity is Rs. 5,00,000. Can employer give Rs. 7,00,000?

  2. What if company was financially in bad condition, and to help the company, a few core employees decide to go for reduced salary. And if employe leaves, then should the Gratuity be calculated based on original basic or reduced basic?

Thanks and regards,
Shefali

4 Likes

Hi @shefalipatil

  1. Yes, Employer can pay higher gratuity to employee

  2. Gratuity as per Gratuity Act will be calculated on last drawn salary. But as mentioned in point 1, Employer can pay higher amount as well.

Any Act always defines Statutory payment to be made. Employer can decide to pay over & above additional amounts. In such case, taxation rules as mentioned will be applicable.

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