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

  • LJ

    Hi ,

    I worked in a top Indian IT company for 6 years and quit last month.

    My total gratuity amount is Rs 51508. Howvere I received only Rs 35592.

    Rs 15000 has been deducted as tax. 

    Why is such a huge amount deducted as tax ? its nearly 31% ?

    Should I not be exempted from tax for being with the company for 6 continous years ?

    Is there any way I can claim this money?

    Please help me.

    My provident fund is also yet to be settled.

    Can you please let me know how much tax will be deducted from it ? and if there is any way to avoid that.

     

    Thanks.

     

     

     

     

     

     

    • Hi Latha, Generally companies would deduct income tax based on your income tax slab. If you are falling in 30% tax bracket, they would have deducted this. You can claim this money thru ITR and get the refund. In case you are not falling in 30% tax bracket, you should immly approach your previous company for clarification.

  • Gaurav

    Dear,

     

    Thanks for hte above KT, a small querry from my side, i am serivng notice period which is going to be completed in 30 days and in between the notice period i will be completeing 5 yrs , so company will give me gratuity or not?

    thanks in advance

    • Gaurav, if you complete 5 years in the company on your last day, you would get Gratuity. If is immaterial whether you are serving notice period.

  • Elpedio Jr

    Hi sir good day,

    Thank you very much for giving knowledge on claiming gratuity pay. I am a sales supervisor for 6 years and 6months. I am now currently working. My wife wants me to resign due to some personal matters. I ask our HR DEPT. how much will i get? They told me that i cannot get any gratuity pay because i am working in sales. Please help me sir. I'd been working in my company with all the good performance 

    • Hi Elpedio, If you are working in India, you are eligible for gratuity after 5 years of completion of service. There is no differentiation whether one is working in sales or non sales division. You may contact HR head to get more clarity on this.

  • Iyer

    Dear Sir

    Kindly clarify the followings please.

    The amount was limit to Rs. 1.00 lakh raised to Rs. 3.50 lakhs and now to Rs. 10.0 lakhs. Previously there was a rider in the gratuity subject 16.5 times of emoluments or limit to the slab whichever is less. Kindly confirm whether the rider of 16.5 times of emoluments is stands or withdrawn. regards.

  • kratika

    it was suparb

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