All About Gratuity – Rules, Eligibility & Calculation

Money

All About Gratuity – Rules, Eligibility & Calculation

By Jupiter Team · · 5 min read

What is gratuity?

Gratuity is paid by the employers to the employees as gratitude for the services rendered during their employment. It is a part of the employees' salaries and is a component of their gross remuneration.

The amount is paid to the employees when their employment ends and is an acknowledgment given to them for providing their services to the organization. Read on to know everything about it.

What is gratuity in salary?

Gratuity in salary is a financial component paid to the employees by the organizations recognizing their services. As part of the salary, it is a benefit aimed to help the employees during their post-retirement years.

The amount is generally paid at the time of retirement; however, every employee who has worked for the company for five consecutive years is eligible to receive this benefit.

How does gratuity work?

The Payment of Gratuity Act, 1972 governs this benefit. Implemented in 1972, the act aimed to cover people working in mines, plantations, factories, fields, ports, and other establishments for more than 10 years.

According to the act, the entire amount is payable by the employer; however, employees can also contribute towards this payment to increase the accumulated corpus.

Some organizations pay the benefit through the companies' resources while others may tie up with insurance providers for group plans. Moreover, the benefits depend on the terms and conditions of such plans.

What are the rules of gratuity?

The three important rules related to the timeline for the payment of this benefit are as follows:

  • An employee must send an application to the company about the money due as this benefit.
  • On receiving the application, the organization calculates the amount and replies to the employee and the controlling authority.
  • The company has to pay the entire amount within 30 days from the date of sending the acknowledgment.

Forfeiture rules

Employers reserve the right to forfeit this benefit partially or even fully if the employee has completed five years of consecutive services. However, this is only if the employee’s termination is due to disorderly behavior like physically harming others during their employment.

Number of employees

Every organization that employs 10 or more people on a single day during the preceding 12 months is liable to pay this benefit. Even if the number of personnel reduces below 10, the company will still have to pay the benefit as per the rules of the act.

Eligibility criteria for gratuity

As per the new gratuity rules, the following are the eligibility norms.

  • Employees eligible for receiving superannuation
  • Individuals who have completed at least five consecutive years of employment with the same organization
  • Retiring personnel
  • Any employee who passes away or faces disability due to an accident or ailment

How is gratuity calculated?

The amount is calculated based on the number of years of employment and the last drawn salary. Additionally, it varies among individuals covered and not covered under the act.

Formula to calculate gratuity for employees covered under the Payment of Gratuity Act, 1972

Companies that hire 10 or more people on a single day during the 12 preceding months are covered under the act. The formula to calculate the amount is as follows:

Gratuity = (15 x last drawn salary x number of years of service) / 26

  • The last drawn salary includes the basic remuneration plus the dearness allowance (DA); no other component is included in the calculation
  • Completed years means when you have worked for more than six months during the year

Formula to calculate gratuity for employees not covered under the Payment of Gratuity Act, 1972

The formula for calculating gratuity amount is as follows:

Gratuity = (15 x average salary for previous 10 months x number of years employed) x 30

  • The last drawn salary includes the basic remuneration plus DA and any commissions
  • The number of employment years includes only the completed years of service

Formula to calculate gratuity for deceased employees

The amount depends on the tenure of the service of the deceased employee subject to a maximum amount of INR 20 lakhs. The table below shows the amount payable to the beneficiaries of a deceased employee:

Service tenure

Amount payable

Less than one year

2 x basic salary

More than one year but less than five years

6 x basic salary

More than five years but less than 11 years

12 x basic salary

More than 11 years but less than 20 years

20 x basic salary

Exceeding 20 years

Half of the basic salary for each six-month period subject to a maximum of 33 times the basic salary

Types of gratuity forms

Form A: Notice of opening

Form B: Notice of change

Form C: Notice of closure

Form D: Notice for excluding husband from a family

Form E:  Notice of withdrawal of notice for excluding husband from a family

Form F: Nomination

Form G: Fresh Nomination

Form H: Modification of nomination

Form I: Application for the benefit by an employee

Form J: Application for the benefit by a nominee

Form K: Application for the benefit by the legal heir

Form L: Notice of payment of the benefit

Form M: Notice rejecting a claim for payment of the benefit

Form N: Application for direction

Form O: Notice of appearance before the controlling authority

Form P: Summons

Form Q: Notice for payment under section 7 of the act

Form R: Notice for payment of the benefit

Form S: Notice for Payment of Gratuity as determined by Appellate Authority

Form T: Application for recovery of the benefit

Form U: Abstract of the act and rules

Income tax exemptions on gratuity

The taxable gratuity rules are as follows:

Any amount received by the government employees except those employed with statutory corporations is fully tax-exempt.

For employees covered under the act, the lowest of the following is tax-exempt:

  • Actual amount received
  • INR 10 lakhs
  • Gratuity = (15 x last drawn salary x number of years of service) / 26

For employees not covered under the act, the lowest of the following is tax-exempt:

  • Actual amount received
  • INR 10 lakhs
  • Gratuity = (15 x average salary for previous 10 months x number of years employed) / 30

Frequently asked questions (FAQs)

Are contractual employees eligible for gratuity after five years of service?

If you are employed on the company’s payroll, you are eligible for the benefit after five years of service. However, if you are under a contract separate from the organization, the benefit is payable by the contractor.

What types of personnel are covered by the Payment of Gratuity Act, 1972?

The act applies to people employed in shops, factories, railway companies, mines, ports, plantations, oilfields, and other establishments. All government employees are covered under the act in all states except Jammu and Kashmir.

Is there any maximum limit on the gratuity amount?

The maximum limit for government employees is INR 20 lakhs and for non-government personnel is INR 10 lakhs.

What is the maximum amount of gratuity that is tax-exempt?

Tax exemption is capped at a maximum of INR 20 lakhs for the amount received from one or more employers.

How much time do employers take to release the gratuity amount?

The gratuity payment rules require the employers to release the amount within 30 days from the full and final settlement date. In case of a delay, the employers need to pay the interest from the due date until the payment is done.

Is the notice period included while calculating the number of years of service?

The amount is calculated from the joining date until your last working day, which includes the notice period since you are still receiving a salary from the company.

How can you nominate someone to receive the gratuity amount in case of your demise?

You will have to fill Form F at the time of joining to nominate one or more beneficiaries to receive the amount in your absence.

In this article

Money

Similar articles that might interest you!

Money

Learn about Recession

By Jupiter Team ·

Money

What is Disbursement? – How it works, Types & Examples

By Jupiter Team ·

Money

Everything You Should Know about Remuneration

By Jupiter Team ·