Gratuity is a lump sum amount that an organization pays to its employee when he or she leaves an organization. This is one of the many retirement benefits offered by an organization to its employees provided if an employee completes working continuously for five years in that organization. The Payment of Gratuity Act 1972 sets out a list of rules and requirements associated with gratuity in India.
A Gratuity Calculator is a tool which helps an individual to estimate how much of gratuity they will earn once they retire.
An individual will become eligible to earn gratuity only if he/she has worked in a company for more than five continuous years.
The term gratuity refers to a sum of amount which an employer pays to his employee for the services rendered by him/her during the period of employment. The gratuity amount is usually paid to an employee either at the time of retirement or at the time of leaving the job provided the fulfilment of certain conditions.
An individual has to render services in an organization for a minimum period of five years of services in order to be eligible to receive gratuity. In case of the death of an employee or disablement of an employee due to an accident or a disease, the gratuity money will be paid before the completion of five years tenure.
The following is the list of Gratuity Eligibility one should satisfy to secure gratuity amount:
1. An employee should have rendered his/her services in an organization continuously for a period of 5 years with a single employer
2. An employee should be eligible for superannuation
3. An employee retires from his/her services
4. Death of the employee or an employee suffers disability due to accident or ill-health.
As per the Payment of Gratuity Act, the following are the list of organizations which are eligible for securing gratuity:
Note: The Payment of Gratuity Act 1972 applies to all those organizations which employ 10 or more people or has employed 10 or more people at any given time in the last 12 months.
The payment of gratuity mainly depends on two factors
• Last drawn salary
• Total number of years of services
There is no set percentage which is stipulated by the law for the exact amount of gratuity an employee is supposed to receive at the time of retirement or at the time of leaving an organization. An employer can use a formula based approach to arrive at the end result or can even pay higher than that.
To calculate the gratuity amount payable to an employee, the Payment of Gratuity Act of 1972 has categorized employees into two categories namely -
• Employees who are covered under the Gratuity Act
• Employees who are not covered under the Gratuity Act
If an organization employs a minimum of 10 persons on a single day for the last 12 months, then all the employees who work in that organization are covered under the Payment of Gratuity Act of 1972. Once the organization comes under the purview of the act, it will always remain covered despite if the total number of employees employed in the organization fall below 10.
The Payment of Gratuity Act 1972 covers all those employees who are working in factories, mines, companies, ports, plantations, mines and all those firms which have more than 10 employees in it. The gratuity amount, unlike the provident fund, is paid completely by the employer and employee will not be contributing anything towards the fund.
The employer can either offer gratuity to his/her employee either from their own pocket or they may opt for a group gratuity plan with a suitable insurance provider. Annual contributions will be made by the employer toward the plan to the insurance provider. The gratuity paid by the insurance company is based on the clauses in the group insurance scheme.
Individuals can calculate the gratuity amount due to them using the Online Gratuity Calculator tool to arrive at the exact gratuity amount.
For calculating the gratuity amount payable, an employee has to be classified into those who are covered under the Payment of Gratuity Act of 1972 and those who are not.
For employees who are covered under the Payment of Gratuity Act 1972
One has to apply the Gratuity Calculator Formula to calculate gratuity payable to employees who are covered under the Gratuity Act.
Gratuity Amount = (15 X last drawn salary X period of employment)/ 26
15 days of the last drawn salary for every year of service completed or part of thereof in excess of 6 months. The last drawn salary in this context includes basic salary, dearness allowance and commission on sales.
Here 15/26 will represent the 15 days out of 26 working days in a month.
Mr Skanda’s last drawn basic pay is Rs 45000 per month and he was an employee with XYZ Ltd for 24 years and 10 months.
In the above-mentioned case, the gratuity will be calculated using the formula
Gratuity Amount = (15 X last drawn salary X period of employment)/ 26
Gratuity amount of Mr Skanda = (15 X 45000 X 25)/26 = 6,49,038.
In this case, the total tenure of service of 24 years and 10 months of Mr Skanda has been rounded off to 25 years.
For employees who are not covered under the Payment of Gratuity Act of 1972
Formula to calculate gratuity amount for those who are not covered under the Payment of Gratuity Act.
Gratuity Amount = (15 X last drawn salary X period of employment)/ 30
Here, the gratuity amount is paid based on the half month’s salary for every completed year of service. The last drawn salary includes basic salary, dearness allowance and commission on sales.
Here 15/30 will represent the 15 days out of 30 working days in a month.
The total number of years of service will be rounded down to the nearest full year.
For Example: If the employee has a total service of 10 years, 6 months and 20 days, in this case, the period of employment will be factored to 11 years.
Mr Krishna is working in a firm that is not covered under the Payment of Gratuity Act of 1972. His last drawn salary i.e. basic pay is Rs 30,000 per month and he has worked with the organization for 23 years and 5 months.
In the above case, one has to use the below-mentioned formula to arrive at the gratuity amount.
Gratuity Amount = (15 X last drawn salary X period of employment)/ 30
Gratuity amount earned by Mr Krishna is (15 X 30,000 X 24)/30 = 3,45,000
Here, the tenure of service is rounded off to next number and as Mr Krishna has worked in the firm for 23 years and 5 months, the years of service is taken as 24.
The gratuity taxability mainly depends on the nature of the employee who is receiving the gratuity amount. They are classified into three categories namely
Government Employee: A government employee is eligible for tax-free gratuity. The total amount received by a government employee be it a state government or central government or local authority as gratuity will be exempt completely from income tax.
Employers who are covered under Payment of Gratuity Act: In this case, those employees whose employer is covered under the payment of gratuity act, only the last drawn salary of fifteen days will be exempt from income tax.
Employees whose employer is not covered under the Payment of Gratuity Act of 1972: In this case, the least of the following amounts will be exempt from income tax
a) The actual amount of gratuity received
b) Rs 10 lakhs
c) Half month’s salary for every year of employment that the employee has completed with the employer.
Note: In the recently announced interim budget of 2019, the government of India has raised the gratuity limit amount to Rs 20 lakhs from the existing limit of Rs 10 lakhs with effect from March 29, 2018. The move will help those employees who are working in PSUs and for those who are not covered under the Payment of Gratuity Act 1972.
In case of death of an employee, the gratuity will be paid based on the length of service rendered and the maximum benefit will be restricted to Rs 20 lakh.
|< 1 Year||2 times of basic pay|
|1 year or more but less than 5 years||6 times of basic pay|
|5 years or more but less than 11 years||12 times of basic pay|
|11 years or more but less than 20 years||20 times of basic pay|
|20 years or more||Half of the salary for every completed 6 months subject to a maximum of 33 times of emolument (salary)|
In some cases, the payment of gratuity to an employee stands wholly forfeited if
For forfeiture of an employee, one should have received termination orders which contains charges as established to the effect that the employee was found guilty of the aforesaid misconduct.
In one of the cases, it has been held that in the absence of termination order containing any of the above allegations, the gratuity of an employee cannot be forfeited.
Form A Rule 3(1)- Form of opening
Form B Rule 3(2)- Form for change of establishment
Form C Rule 3(3)- Form for closure of the establishment
Form D Rule 5(1)- Form for excluding husband from the family
Form E Rule 5(2)- Form for withdrawal of notice for excluding husband from the family.
Form F Rule 6(1)- Form of nomination
Form G Rule 6(3)- Form for fresh nomination (with the help marriage)
Form H Rule Rule 6(4)- Remolding of nomination
Form I Rule 7(1)- Form for the payment of gratuity
Form J Rule 7(2) - Form for the payment of gratuity used by the nominee
Form K Rule 7(3)- Application for the payment of gratuity by the legal heir.
Form L Rule 8(1)(i)- Notice for payment of gratuity issued by the employer to the employee
Form M Rule 8(1)(ii)- Notice for reason of rejection of the gratuity payment issued by the employer
Form N Rule 10(1)- Application made to the labour commission made by an employee
Form O Rule 11(1)- Issued by the authority to appear before the controlling authority.
Form P Rule 14- Order issued by the authority to appear for the hearing
Form Q Rule 16(1)- Particulars of the application under section 7
Form R Rule 17- Notice to make gratuity payment
Form S Rule 18(8)- Notice for payment of gratuity
Form T Rule 19 - Application for recovery of gratuity
Form U Rule 20- Abstract of the Act and Rules
Under the payment of gratuity act, if the amount of gratuity is not paid by the employer to the person entitled to it within the specified time, the controlling authority will issue a certificate for the same amount to the collector who will recover the amount with an interest rate similar to the interest rate central government. Before granting a certificate under this section, the controlling authority will provide applicant with a fair chance to justify the problem of such certificate. If the amount of gratuity exceeded the amount of interest will be provided under this section.
Once you completed one service year you must create a nomination within 30 days from the date of completion of one service year. At the time of nomination, the applicant has to make nominee in the favour of more than one family members and if the nomination made by the applicant in favour of a person who is not his/her family, then it is considered as illegal. The interest rate will be returned back to the applicant if the nominee dies before the death of the applicant. In such cases, the applicant should make a new nomination in order of such interest rates. The applicant can use Form F to make a nominee under the gratuity.
The employer in all the organizations should pay his her employees a gratuity amount within 30 days of it being billed. If in case, the employer fails to do so within the specified time limit of 30 days, then he or she will have to pay simple interest on it from the date on which the gratuity becomes payable at a rate not exceeding the rate stipulated by the federal government.
Gratuity amount should be paid to the eligible employees either in cash or via a bank cheque or a demand draft as per the employees choice.
In case of the firing of an employed for disorderly conduct or lawlessness or any such act of violence then the gratuity amount need not be paid to him or her.
During the tenure of employment, if an employee commits any such act which constitutes an offence which involves moral turpitude, then in such case the question of payment of gratuity amount will not arise.
If there is no termination order which contains any of the above-mentioned charges, then the employer has to pay the gratuity amount which is due to the employee.
1. Who is eligible for Gratuity?
All those employees who have completed five years of continuous service in the same organization are eligible for gratuity. The employee will be eligible to receive gratuity amount on the termination of the employment after serving an organization continuously for five years or more.
2. When does an individual get the gratuity amount?
The gratuity amount is payable on
Please Note: The five years of continuous service in the same organization is not required in case of death or disablement of an employee. In such cases, the nominee or heir of the employee will be entitled to receive the gratuity amount.
3. What is the gratuity calculator formula?
There are two different formulas to calculate the gratuity amount:
Employees who are covered under the Gratuity Act
Gratuity = Last drawn salary*15/26*Number of completed years of service
Please note: Last drawn salary is the addition of both Basic Salary + Dearness Allowance (DA)
Employees who are not covered under the Gratuity Act
Gratuity = Average Salary * ½ * Number of years of service
Note: Average Salary = Basic Salary + Dearness Allowance + Commission (as a percentage of turnover achieved by the employee, if any)
4. Is five years of continuous service rule a must get gratuity amount?
As per the gratuity rules, the condition of five years of continuous service is usually applicable but the same is exempted in case of death or disablement of an employee during the tenure of his/her employment in an organization. In such cases, the individual's nominee or legal heir will be eligible to get the gratuity amount (applicable only in case of death of the employee).
5. Are the temporary or contractual employees eligible to receive gratuity?
Yes, the temporary or contractual employees are eligible to receive gratuity amount if they are considered as employees of the organization.
Note: Those who are in apprenticeship are not eligible for gratuity.
6. What is the income tax limitations for gratuity amount?
As per the recent notification from the Government of India, the income tax relations for gratuity payment limit has been increased to Rs 30 lakh from the previous limit of Rs 10 lakh.
7. Is nomination facility available for gratuity?
Yes, nomination facility is available for gratuity and one has to fill in Form ‘F’ a the time of joining the company to nominate the beneficiary.
8. Gratuity amount received by an employee is taxable under which head under Income Tax Act?
The gratuity amount received by the employee on retirement or during the service period is taxable under the head Income from Salary. The amount of gratuity received should be shown under the head salaries while computing income tax returns. The same rule is applicable to all the government and private employees.
9. If an organization is not financially stable can it refuse to pay gratuity amount to its employees?
Irrespective of the financial stability of an organization, they are bound to pay the gratuity amount to its employees. They cannot cite the financial loss as a reason for refusal of payment of gratuity.
10. What is the maximum benefit amount of gratuity in case of death of an employee?
The maximum gratuity benefit amount in case of death of an employee is restricted to Rs 20 lakhs.
11. Is Gratuity Amount taxable in India?
Gratuity is treated as the retirement benefit and is exempt from tax, subject to certain conditions as laid down in the Income Tax Act. For taxation, employees are categorized into two categories:
Any gratuity amount received by a government employee during the term of their service is taxable. But if the same is received post-retirement or death or superannuation then the entire amount is exempt from tax.
12. What is the treatment for taxation of gratuity amount in case of private-sector employees?
In the case of Private employees, they are segregated as
If employees who are working under private sector are covered under the Payment of Gratuity Act of 1972, then the gratuity amount received is tax-exempt to the extent of least of the following
1. Actual Gratuity amount received
2. Last Drawn Salary amount * 15/26 * Number of completed years of service
3. Statutory Limit of a maximum of Rs 20 Lakhs (maximum limit or amount notified by the government)
Please Note: If the gratuity amount received by an employee who works in the private sector exceeds the above-mentioned limit, then it becomes taxable.
When you feed in the facts for the gratuity calculator, it is extremely important to remember that you get your facts right. For example, the details on the salary part is the most important. You need to take into account not only your basic salary, but, also your Dearness Allowance. Do not add every possible perk that you receive into the calculator, or else you would arrive at a wrong number.
Remember, the final number that would come would be based on your data and hence that needs to be carefully entered. If you are confused, you might want to seek help from your Human Resource Department. Also, keep yourself abreast of the latest changes from time to time, as there is a possibility that the government could notify some changes. Also, while using the calculator, if you arrive at a sum of more than Rs 20 lakhs, remember that the amount is capped at Rs 20 lakhs and hence you need to only take that amount into consideration.
Things you should remember before availing gratutity
If you are going to leave a company before a period of 5-years, you are unlikely to receive your gratuity. It is therefore paramount that you stick to one company and avoid changing your employer very frequently. This would ensure that you do not miss out on the compensation to be received from gratuity. Also, remember that this benefit is largely linked to your last paid salary, including basic and DA, so one needs to ensure that the basic and dearness allowance is high, while your other perks are lower. This would ensure higher gratuity when you leave the company.
At all times it is important to remember the tax liability that may arise in this case and pay the same accordingly. The most important thing is to complete your tenure of 5-years to ensure that you are entitled to the same.