A gratuity amount is a financial benefit provided by an employer to an employee as a token of appreciation for their long-term service. Employers typically pay gratuity upon an employee’s resignation, retirement, or death. In India, the Payment of Gratuity Act, 1972, regulates these payments to ensure financial security for employees after years of service.
An employee must fulfill certain conditions to be eligible for gratuity:
Gratuity is calculated based on an employee’s last drawn salary and the number of years of service. The formula differs for employees covered under the Payment of Gratuity Act and those who are not.
Gratuity = (Last drawn salary × 15 × Number of years of service) / 26
Gratuity = (50,000 × 15 × 20) / 26 = Rs. 5,76,923
Gratuity = (Last drawn salary × 15 × Number of years of service) / 30
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Employers calculate the gratuity amount as 15 days of salary per year of service, but the actual percentage varies based on an employee’s salary and duration of employment. For government employees, predefined rules determine the gratuity percentage and eligibility.
Employers must pay the gratuity amount within 30 days of its due date. If they delay the payment, they must also pay simple interest on the gratuity amount from the due date until they complete the payment.
Gratuity payments are subject to tax exemptions under Section 10(10) of the Income Tax Act, 1961:
Government Employees: The entire gratuity amount is fully exempt from tax.
Non-Government Employees Covered Under the Gratuity Act: The least of the following is exempt:
Non-Government Employees Not Covered Under the Act: The least of the following is exempt:
Government employees are entitled to retirement gratuity as per their service rules. The formula remains the same, but the gratuity ceiling is fixed at Rs. 20 lakhs. If an employee dies in service, the nominee receives the gratuity based on the employee’s service duration.
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To claim gratuity, an employee or their nominee should follow these steps:
Gratuity is an essential financial benefit that rewards employees for long-term service. The Payment of Gratuity Act, 1972, ensures that employees in India receive fair compensation upon retirement or resignation. Understanding gratuity calculation, eligibility, and tax exemption can help employees maximize their benefits.
An employee must complete five years of continuous service to be eligible for gratuity.
Yes, if the company has 10 or more employees, gratuity payment is mandatory under the Payment of Gratuity Act, 1972.
Gratuity is tax-exempt up to Rs. 20 lakhs for non-government employees. For government employees, it is fully exempt.
If an employer delays gratuity payment beyond 30 days, they are liable to pay simple interest on the amount.
Employers can refuse gratuity only in cases of employee misconduct leading to dismissal.
Use the formula: (Last drawn salary × 15 × Years of service) / 26 for companies covered under the Gratuity Act.
Yes, the maximum limit for tax exemption on gratuity is Rs. 20 lakhs.
Gratuity is paid to the nominee, and there is no minimum service requirement in case of death.
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