What is gratuity and how it is calculated?

What is gratuity and how it is calculatedWhat is gratuity and how it is calculated?

Gratuity is the form of gratitude provided to employees in monetary terms for services rendered to the company. It is the important form of social security benefit provided as per Gratuity Act. Employees would get benefitted through Gratuity when they stay longer period in a company. In this article I would detail about what is gratuity, who is eligble for gratuity payment, how it is computed and how gratuity is taxed.

Who is eligible for gratuity payment?

An employee is eligible for gratuity, if he/she has completed 5 years of complete service with the company. However in case an employee expires, this 5 years is relaxed and he would be paid for every 1 year completed service. Please note that company need to have at least 10 employees so that they can pay gratuity to eligible employees.

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When is gratuity payable or paid?

Eligible employees would be paid gratuity in case of resignation, retirement or superannuation or death.

How Gratuity is computed?

Gratuity is paid for 15 days of every completed year of employment after 5 years of service. If you have worked for more than 6 months in a year, it would be treated as 1 completed year. Means if you worked for 5 years 6 months, you are eligible for 6 years gratuity. However if you worked for 5 years 5 months, you are eligible only for 5 years gratuity. Below is the method of computation

  • Gratuity paid for 15 days for every completed year of service
  • Your last drawn basic salary + DA will only be considered for computation
  • Number of working days would be considered as 26.

                                    15 days x no. of years completed

Gratuity payable =      ——————————————-

                                                26 (working days)

e.g. if you have basic salary + DA as Rs 40,000 per month and you worked for 5 years 6 months which is equivalent to 6 years. Below is the computation of gratuity.

                   15 x Rs 40,000 x 6 (years)

Gratuity =    ——————————– = Rs 138,641

                                26

Tax treatment for gratuity income

For the purpose of gratuity taxation, employees are divided into 3 categories. Govt employees, other employees who are covered under payment of gratuity act and other employees who are not covered under payment of gratuity act.

a) Govt employees: Gratuity is fully exempted from tax for all Government employees.

b) Other employees who are covered under payment of gratuity act: Least of the following is exempted from income tax

  • 15 days of salary for every completed year of service (Including part there-of)
  • Rs 10 Lakhs
  • Actual gratuity received

Illustration: An individual who has Rs 40,000 as basic + DA per month and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 6 x 15/26 = Rs 138,641

c) Other employees who are NOT covered under payment of gratuity act: Least of the following is exempted from income tax

  • Half month average salary for every completed year of service (average salary is arrived for the basic salary+ DA received in the last 10 months). Part of the year would be ignored
  • Rs 10 Lakhs
  • Actual gratuity received

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Illustration: An individual who has Rs 40,000 as basic + DA per month in the last 10 months and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 5 x 15/26 = Rs 115,384

In case an employee has claimed gratuity exemption earlier, the amount would be reduced from current amount and maximum eligible exemption would be Rs 10 Lakhs only.

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Suresh
What is gratuity and how it is calculated

94 comments

  • aparna

    Hello,

    As you said its a gratitude towards employee, is it fine to put gratuity component in salary breakup and deducting gratuity amount everymonth, and when any employee will complete 5 years then only he will be entitled to get his own (total gratuity amount which got deducted) money, or the employee who has not completed 5years has to leave his gratuity amount which got deducted evey month from his salary, please explain. how come it can consider as gratitude.

  • jagadish

    HI sir how we know private school or company its under act of gratuity

  • Manoj

    I joined 22nd nov.2011& resign 21 april2017 leave company 21sunday may 2017 clearance no dues on 22 may 2017 i eligible.for five year or 6 year gratuaty.

  • Rajeev Deshmukh

    My wife worked as a primary school teacher fro 1st June 2011 to 30th April 2017 at a reputed school in Pune. The contract was renewed every year. However, there was no break in service, and she recd continuous salary for all the months she worked in the school.
    When she went to collect her dues, she was denied the gratuity stating the first 2 years she worked voluntarily, and is hence not eligible to receive Gratyity.
    This is pure injustice, and against the Gratuity Act, which clearly states that each employee is eligible to get Gratuity after 5 years of continuous service.
    Since she has put in 5 years 11 months of service, she MUST receive Gratuity as per ACT. Please let me know if I am right!

  • Kiran

    Please clarify. I worked for company for 7 years 3 months. My basic is Rs.36500. I served for 20 days in my last month of job for which they paid basic of 23548 in my last month. Now does the Gratuity computed on the Rs 36500 or on 23548.

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