What Is Gratuity? Here Are 5 Things To Know

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What is gratuity?
Gratuity is a benefit received by an employee in gratitude for services rendered to an organization. Gratuity is paid when an employee completes five or more years of service with the employer.

What is the eligibility to receive gratuity?

An employee will be eligible for receiving gratuity at the following conditions,

  • When he or she retires from the company
  • When an employee resigns, after working for 5 years with a single employer
  • When an employee dies or suffers disability due to illness or accident


What will be the amount?

The gratuity amount depends upon the period of service and last drawn salary of the employee.

It is calculated according to one formula: Last drawn salary (basic salary + DA) X no. of completed years of service X 15/26.

Here, the time period of over six months or more is considered as one year. This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit. On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered five years.


Which employees get gratuity?

Payment of Gratuity Act, 1972, applies to employees of mines, factories, oilfields, ports, railway companies, shops and other establishments related to them. All kinds of government jobs come under gratuity act. It is applicable in all states of India except Jammu and Kashmir.


Employees can nominate someone to receive the gratuity in the case of death of that employee. To nominate one or more heirs for the gratuity amount, the employee needs to fill in Form F when joining a company. Things To Consider Before Saying Yes To An Offer Letter

Tax for gratuity

For government employees, the entire amount of gratuity received on retirement or death of an employee is currently not taxable. Any gratuity amount received by an employee during his or her service is taxable. In the case of others, current income tax rules on gratuity depend on whether employees are covered under the Payment of Gratuity Act, 1972 or not.


Read more about: gratuity, employee
Story first published: Monday, March 13, 2017, 12:11 [IST]
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