Gratuity settlement process

Dear All,

Request your kind clarification on below question related to gratuity process:

  1. Is it required to show gratuity settlement in Form 16?
  2. What is the process followed in your company for gratuity settlement? Is gratuity settlement processed through payroll (i.e. after receiving the settlement from LIC / trust) or is it directly settled to an employee from gratuity trust / bank account ?

Hi Jai,

  1. Yes, you need to show Gratuity settlement amount in Form 16.
  2. It is advisable to pay gratuity via payroll [calculate and mentioned in the payroll] because this amount you will get from the trust fund later.

Process the claim sheet to trust fund Later, once you receive the amount from trust fund ,settle it to employee.

Dear Arpana,

Thanks a lot for your prompt response on this. I heard that if gratuity is routed through payroll, then it becomes taxable. Is this correct?

Also in our company gratuity claim settlement bank account and salary account is maintained in two different bank. In that case how do we process gratuity settlement through payroll. Kindly advice

Hi Jai,

Gratuity is tax exempted up to 20Lakhs (Life time). If it’s exceed 20L then the excess amount is taxable. So you can show it in Form-16 earning side as well under exemption.

Gratuity amount will be considered in payroll/settlement and will be considered as earnings and the same amount will be considered as an exemption up to 20 Lakhs. In form 16, the Gratuity paid amount has to be added in gross income and the same has to show in exemption part.

Hi Jai,

Yes, you heard it correct. and this is this right way of doing it. In my company we follow the same.

Gratuity amount will never go with salary, you have to minus gratuity amount while paying settlement amount.

once you receive employee gratuity amount to trust account then pay then via cheque or online transfer.

Please revert in case still you have any doubt.

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Hi Arpana,

Gratuity amount will never go with salary, - Thanks a lot for clarifying this

"You have to minus gratuity amount while paying settlement amount - I am using GreytHR for payroll process. In case I remove the gratuity while processing settlement then how will show it in Form 16 - meaning only if I process the amount via portal then the same will reflect in payroll file and other files right.

Apologies for asking too many follow-up questions.

Hi Jai,

Please ask until you get clarification on the topic.

You don’t do any alternations in portal. This activity you need to do it in excel just to be clear what amount should go from company account for FFS and how much amount need to pay from Gratuity trust fund.

Bifurcation template is attached for your easy reference.

Please revert in case of any doubt.


Thanks a lot, My doubt got cleared.

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Thank you @Arpana for being awesome! To go the extra mile of assuring selfless help to a new fellow member and share knowledge and doing so upholding the community values we stand for. Thank you!

I remember reading a great quote- “A thousand words will not leave so deep an impression as one deed.
– Henrik Ibsen

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Thank you Vidyaranjan. It my pleasure to help our community members. :slight_smile:

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