What is Gratuity Benefit Amount and when does it get paid?
Gratuity refers to an amount of money which an employer pays to his employee in return for services offered by him to the company. However, only those employees who have been employed in the company for five years or more than five years are given gratuity. You may perceive gratuity like gratitude expressed by the company towards their employees for their services. It is governed by the Payment of Gratuity Act 1972.
It is payable…
On Superannuation (or) Retirement.
On your Resignation (or) Termination.
On death or Disablement due to accident or disease.
On Retrenchment (or) Layoff.
VRS (Voluntary Retirement Scheme)
To be eligible, an employee has to render his/her services for 5 continuous years. However, this condition is not taken into consideration in situations of demise or disablement of an employee.
For the calculation of the 5 years, a single year is assessed as 240 working days for employees working in organisations that do not involve work underground. For those working in mines and other such fields, a year is assessed as 190 days.
For instance, if Mr. A has worked for 4 years and 7 months in an organisation, it will be counted as 5 years. Contrarily, if he has worked for 4 years and 1 month, it will be taken as 4 years.
The 5 years of continuous service also include interruptions caused by strike, lockout, accident, leaves, layoff, absence from duty without leave, and termination of service not on the part of an employee.
As per the gratuity rules, an employee will be eligible to avail gratuity upon –
- Disablement due to an accident or a disease.
- Lay off due to retrenchment.
For calculation of gratuity of employees in such organisations, the formula is –
Gratuity = (15 x last drawn salary x number of completed years of service) / 26
- The last drawn salary includes basic and dearness allowance (DA). Any other component of income will not be included in the salary.
- Completed years of service include any year where an employee has served for more than 6 months.
For instance, if Mr. B works for an organisation for 12 years and 8 months, his completed years of service will be taken as 13 years as per the gratuity rules . However, if he had worked for 12 years and 3 months, it would be considered as 12 years.
Now, let us assume that Mr. B’s last drawn salary was Rs.77,000. If he worked for 13 years, his gratuity will be –
(15 x 77,000 x 13) / 26 = Rs.5,77,500.
For calculation of gratuity of employees not covered under the act, the formula is –
(15 x average salary for the last 10 months x number of years employed) x 30
- Salary includes basic, DA, and commissions. Any other component of salary is not to be included.
- The number of years employed is only considered based on the completion of each year of service.
For instance, if Mr. C has been employed at an organisation for 15 years and 8 months, his number of years employed will be considered as 15 years.
Now, let’s assume that Mr. C’s average salary for the last 10 months was Rs.92,350. Then, his gratuity will be –
(15 x 92,350 x 15) /30 = Rs.6,92,625.
As per the gratuity rules, employers can forfeit to pay a gratuity of the employee who has been terminated for the following reasons –
- Committing an offence involving moral turpitude.
- Riotous or disorderly conduct or any other violent act.
An organisation is liable to pay gratuity to its employees even if it declares bankruptcy. No court decree or order can restrict an employer against it.
A gratuity of up to Rs.20 Lakh paid by organisations covered under the Payment of Gratuity Act, 1972, other than central and state government departments, defence, and local governing bodies, is exempt from tax as per the gratuity rules 2020 . Earlier, this threshold was set to Rs.10 Lakh.