Gratuity is a benefit that is payable under the Payment of Gratuity Act 1972. Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. However, gratuity is paid only to employees who complete 5 or more years with the company.
But not everyone is aware that gratuity is part of our salary. Gratuity is a reward paid by an employer to Employee for services rendered by him. In simple words, it is a retirement benefit received by the employee when he leaves his job.
What is Gratuity?
Gratuity is a financial component offered by an employer to an employee in recognition of his/her service rendered to an organization. It is typically a portion of the salary an employee receives and can be viewed as a benefit plan designed to aid an individual in his/her retirement.
Gratuity is paid by an employer when an employee leaves the job after serving the same organization for a minimum period of 5 years. One can consider it to be “A financial regard” to an employee for rendering continuous service to an employer.
Who gets Gratuity?
An employee who completed 5 or more years of service is eligible for gratuity. This condition of 5 years of service is not applicable in case of death or any disability of an employee.
Condition for Gratuity
- An employee should be eligible for superannuation
- An employee retires
- An employee resigns after working for 5 years with a single employer
- An employee passes away or suffers disability due to illness or accident
How to calculate gratuity tax treatment?
Gratuity is taxable when it is received under the head Income from salary. An employee can claim an exemption maximum of up to Rs. 10, 00,000. However, calculation of gratuity varies according to various categories of employees as follows:
You can use our free Gratuity calculator to calculate your exemption amount.
|Government employee||Fully Exempt|
|A non-government employee covered under the Payment of gratuity act 1972||Maximum exemption from tax –
Least of the following:
Meaning of Salary = Basic Salary + D.A
|Non-government employee not covered under Gratuity Act 1972||Maximum exemption from tax –Least of the following:
Meaning of Salary = Basic Salary + D.A + percentage-wise fixed commission on turnover
For example, you have worked with a company for 20 years and had Rs.25,000 as his last drawn basic plus DA amount, then,
Gratuity Amount for you= 20*25,000*15/26 = Rs.2,88,461.54
However, an employer can choose to pay more gratuity to an employee. Also, for the number of months in the last year of employment, anything above 6 months is rounded off to the next number while anything below 6 months in the last year of employment is rounded off to the previous lower number.
If I resign from a company after 4.5 years of service, am I eligible for gratuity?
No, you have to serve at least 5 years in a company to get gratuity payment. A Madras High Court ruling held that you can avail gratuity if you have completed 240 days of service in the fifth year. It is best to check with the HR of your company about this. However, if someone dies while in service, the gratuity amount will be paid to their legal heir even if they have not completed 5 years of service. In addition, the amount received by a nominee/heir will not be taxed.
I am a contract employee in a company. Will I get gratuity if I resign or retire after 5 years?
If you are on the company rolls and are considered an employee of the company, then you will receive gratuity. However, if you are under a contractor that is separate from the company then the gratuity should come from the contractor and not the company.
What kind of employees does the Gratuity Act, 1972 cover?
Payment of Gratuity Act, 1972, applies to employees of factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments related to them. All kinds of government jobs have also been included under the purview of this act. It is applicable in all states of India except Jammu and Kashmir.
Is there any difference in calculation of gratuity for employees who are not covered under the Gratuity Act?
Even if you are not covered by the Gratuity Act, your employer may pay you gratuity. The calculation for this is: Gratuity = Average salary (basic + DA) * ½ * Number of service years. In this case, the service years are not rounded off to the next number. So if you have a service of 12 years and 10 months, you get gratuity for 12 years and not 13 years.
Is there a cap to the amount I can receive as gratuity?
Yes. A company cannot pay you more than Rs.10 lakh as gratuity, irrespective of the number of years you have completed. This limit is also applicable to gratuity you can receive from different employers during your lifetime. If your company wishes to pay you more money, they can title it under ex-gratia or bonus.
How do I nominate someone to receive my gratuity in case of my death?
To nominate one or more heirs for your gratuity amount, you need to fill in Form F when joining a company.
How many days will it take for the employer to remit the gratuity amount?
Usually, gratuity is released along with or just before/after your full and final settlement is done. The government mandates employers to pay the amount within 30 days. If there is any delay in payment, the employer has to pay a simple interest on the amount from the due date until the date when payment is made.