Gratuity is the amount that employers pay their employees in return for the services rendered by them to the organization. However, it is paid only to those employees who have completed at least five years of service for a particular company.
However, an employee is eligible for gratuity before completing at least five years of services if he or she is disabled due to an ailment or an accidental injury.
This employee benefit is regulated by the Payment of Gratuity Act, 1972. The amount depends on the employee’s last drawn monthly salary and the number of years completed working with the particular company.
The gratuity may also be paid in case of an employee’s demise before the end of five years.
Eligibility criteria for gratuity
Gratuity is a lump sum paid by your employer when you leave the company after having worked for at least five years.
The eligibility criteria as per the Payment of Gratuity Act, 1972 are as follows:
- You should have rendered your services to the same company for a minimum of five consecutive years.
- You must be eligible for superannuation.
- You should have either retired or resigned after at least five years of working with the same employer.
- The benefits are given to you in case of your disability due to an accident or a medical condition; your nominee receives the benefit in case of your demise.
About gratuity calculator
Private sector employees working for companies offering Employee Provident Fund (EPF) benefits receive gratuity after rendering services for at least five consecutive years.
However, in some cases (employee’s disablement or demise), gratuity can be paid before five years.
An online gratuity calculator enables you to estimate the amount you may receive if you are considering leaving the organization after working for a minimum of five years or are retiring.
It is a handy tool to calculate the amount you will receive on leaving the company.
How to calculate gratuity?
The gratuity amount primarily depends on two factors, which include your last drawn salary (basic + dearness allowance) and the total number of years in service for the company.
The law does not stipulate any specific percentage for employees to receive this benefit at the time of leaving or retiring from the company.
Employers can adopt a formula-based approach to determine the amount or pay higher than this amount.
What is the formula for calculating gratuity?
The Payment of Gratuity Act, 1972 classifies employees in two categories, which include the following.
- Personnel covered under the Act
- Employees not covered under the Act
Any company that employs 10 or more employees in one month for the last 12 months is required to cover all its personnel under the Payment of Gratuity Act, 1972.
If the number of employees reduces below 10, the company is still liable to pay gratuity to the remaining personnel.
The Payment of Gratuity Act, 1972 covers people employed in mines, factories, plantations, ports, and companies employing more than 10 people.
Unlike Provident Fund, the employees do not contribute towards gratuity and the entire amount is paid by the companies.
Employers can opt for a group gratuity plan from a reliable insurance service provider wherein the company makes annual contributions to this plan.
The gratuity calculation formula varies on whether you are covered or not covered by the Payment of Gratuity Act, 1972.
For covered employees, the formula is Gratuity Amount = last drawn salary * employment duration * 15/26
- The number of working days in a month is considered 26
- The gratuity amount calculation is based on the earnings for 15 days
- The last drawn salary should include the basic income, dearness allowance (DA) (for government employees), and sales commissions (if any)
If you have completed 11 years in your company and your last drawn salary including DA is INR 65,000, the gratuity amount is
Amount = 65,000 * 11 * 15/26 = INR 4,12,500
If you are not covered by the act, here is how to calculate gratuity amount:
Amount = last drawn salary * employment duration * 15/30
In the example above, the gratuity amount comes to INR 3,57,500
How can a gratuity calculator help you?
If you have worked for the same company for at least five years and are near the age of superannuation, you are eligible to receive gratuity. An online gratuity calculator in India can help you in the following ways.
- Determine the approximate amount due
- Plan your long-term finances
- Save your time and reduce your efforts
- Use it from any place any time as per your convenience
What are the benefits of using a gratuity calculator?
A gratuity calculator online is an efficient and user-friendly tool that allows you to estimate the approximate amount due to you. Here are some benefits of this calculator.
- Quick and simple calculation with instant results.
- Simple details like salary and number of years in employment required.
- Elimination of human errors in the case of manual calculations.
- Shows the gratuity amounts for both covered and uncovered calculations.
What are the tax rules for gratuity?
The tax applicability on the gratuity amount depends on the type of organization. If you are a government employee, the entire amount is exempt from taxes.
If you work for a private sector company, the lowest amount from the following is tax-free only if your employer is covered under the Payment of Gratuity Act, 1972.
- Eligible gratuity amount
- INR 20 lakhs
- The actual gratuity amount received
The maximum amount of gratuity you can claim as tax-exempt cannot exceed INR 20 lakhs during your entire working life.
Frequently asked questions (FAQs)
Who is eligible to receive gratuity?
All employees who have worked for at least five consecutive years with the same organization are eligible to receive gratuity.
When can you receive the gratuity amount?
After serving for at least five years in the same company, the gratuity amount is payable on:
- Resignation, retirement, or termination
- Opting for a voluntary retirement scheme (VRS)
- Demise or disability due to an accidental injury or ailment*
- Lay off or retrenchment
Please note: Gratuity is payable to you or your nominee (in case of your passing away) even if you have not worked with the same company for five consecutive years.
Can you have a nominee in your gratuity?
Yes, you can include a nominee in your gratuity. You need to fill out Form F while joining the company and provide their details.
Under which heading is the gratuity amount taxed?
The gratuity amount received either on resignation or termination is taxed under the heading ‘Income from Salary’.
You must add the amount to your salary income and the rule is the same for the government as well as private-sector employees.
Can a company refuse to pay the gratuity amount in case of financial instability?
Companies covered under the Payment of Gratuity Act, 1972 are liable to pay the gratuity amount to their employees irrespective of their financial situation.
The company cannot refuse payment stating loss as the reason.
How is the gratuity amount taxed?
The Income Tax Act lays down the rules governing the taxation of gratuity and it depends on whether your employer is a government or a private sector company.
Government employees who receive the gratuity amount during their service are liable to taxes. However, if the money is received on retirement, the entire amount is tax-exempt.
The lowest of the following gratuity amount is tax-free for private-sector employees:
- INR 20 lakh
- Actual amount received
- Eligible amount based on the gratuity formula
Can you receive gratuity if you haven’t worked for five years with the same company?
No, you must work for a minimum of five consecutive years in a company to be eligible for gratuity.
However, if you are suffering from an ailment or face disability in an accident, you are eligible to receive gratuity even if you have not worked with the same organization for five years.
Your nominee can also receive the gratuity amount in case of your demise before five years of service.
If you are a contract employee, are you still eligible for gratuity after working for five years?
If you are on the company's payroll, you will receive the gratuity. However, if you are under a contract, the contractor is liable to pay you the due gratuity amount.
Do you lose your gratuity amount if your company goes bankrupt?
No, your employer is still liable to pay the gratuity amount and no court can put a stay on this payment even if the company goes bankrupt.
How long do employers take to release your gratuity payment?
If you are eligible for gratuity, you can submit your application within 30 days from the date the amount becomes payable.
However, if you do not apply within this time, your claim does not become invalid.
The employer must provide the gratuity amount details within 15 days of receiving your application. The entire amount has to be paid within 30 days of receiving the application.
The company is liable to pay simple interest if there is a delay in clearing the gratuity payment within 30 days.
In this article