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

103 comments

  • Deepesh

    Hi, I left my previous organisation after working there for 4 years and 8 month and as per company policy I received received my gratuity as a part of F&F settlement. I would like to know if my gratuity comes under taxable income just because I did not complete 5 years of service?

    • Deepesh, As per my knowlege gratuity is paid after 5 years of completed service. Taxability is given in the article. I am not sure how you got gratuity when you worked for less than 5 years. Can you pls recheck.

  • MD

    Hi, I have worked in a private organisation for 5 years and 2 months. Is there any way that the Company can deny paying me gratuity? Please also let me know that in case I resign after completion of 5 years and 2 months, and have notice period of 3 months, what is the time period for which gratuity will be calculated?

    • Mukta, If you worked for more more than 5 years, company has to pay gratuity. If they refuse, you can proceed legally. Since you would work for 5 years 5 months if we round off it would be 5 years only. You should get 5 years (15 days per year of basic salary) gratuity.

      • mahesh

        i am working in software firm from 11-08-2011 to till date i need to quit this job, i am planning to drop paper on 30/08/2016 so that i need to serve notice period for another two months,Including my notice period i completed 5 years of service,can i eligible for Gratuity including my notice period.(on 11-08-2016 i am completing 5 years of service)can anyone can help me out.

  • bharath

    Is gratuity calculated on current basic salary and DA or is it calculated on yearly basis??? Please clarify on this doubt!! Thank you……….

  • Kiran

    Hi Suresh,

    This article was interesting and very useful.

    I have the below query related to taxation of superannuation amount, could you advise on the same. ( May be an article on SuperAnnuation could be useful to many)

    I commutted 1/3 of my superannuation amount which was Rs63,990.00, my previous company have deducted 30%+3%cess as tax on this and have issued a form16 to this effect, could you please advise if superannuation amount can be considered part of standard deductions amount of Rs 2,00,000 (I'm and NRI and I don't have any other salary income in India) ? If so, could I file my IT returns to claim refund ?

     

    Thanks,

    Kiran

     

     

     

    • Kiran, this is part of salary component, hence it is treated as regular income. This can be shown as standard deduction of RS 2L and you can claim for refund.

  • ABHI

    Hi suresh,Good article on gratituity .Thanks for giving me the scope for clarifying my doubt on it.

    I am working in a private organisation for past 5 years 1 month.

    While joining in this company,I was given post of GRADUATE ENGINEER TRAINEE ,after 1 year i have got conformed and was given post of ENGINEER.So,my total experience comes in this way :

    GRADUATE ENGINEER TRAINEE — 1 year

    ENGINEER                                     — 4 year 1 month

    Please tell me when am i elligible for gratuity?

     

     

    • Abhi, Some of the companies consider trainees as seperate employees from that of permanent and all benefits are not counted. They could count only after they confirm. Please check with your HR or payroll section and they should be able to clarify. 

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