What is Gratuity |How to Calculate Gratuity |Eligibility for Gratuity?

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Gratuity is an important part of income, paid as gratuity by company. This subject pops up many questions in minds of employees working under an organization, such as what is gratuity? How to calculate gratuity payment? These are some question that every employee thinks. Here we have covered all information about gratuity that will help you throughout your life.

What is Gratuity? How does it work?

Gratuity is monetary reward for being in service with company. It is reward or gift that is given by employer to employee for working for long term. In other words, it is wages made to an employee by employer either at time of retirement or when you leaving job.  It is given to employee once you have completed at least 5 years of continuous service.

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It is mandatory for any employer to pay gratuity to all employees in private sector or public sector. Also, it acts like retirement benefits and become part of post retirement plan. This gratuity is given in form of cash to employee after leaving job.

What is Gratuity Payment and when you will get gratuity amount?

Now, let’s talk about what is gratuity payment and when you’ll get it. Employees who have completed 5 years of continuous years of service with employer are eligible for gratuity. This gratuity payment is given by employer to employee at end of service. You can also call it employee benefit for public sector and private sector.

Check Gratuity rule and Eligibility

Are you worried that how to check you’re eligible for gratuity or not? Then we tell you eligibility process for gratuity. In simple manner, employee will get gratuity benefits if you completed at least 5 year of continuous service under an organization. Also, organization in which you are working must be at least 10 employees or more.

If an employee expires, gratuity is paid for number of years worked with company irrespective of his tenure with company. Gratuity amount will be paid from employer’s side. It will not deduct from your salary. If person has terminated from job due to illegal activities, gratuity will not pay to you.

Gratuity Rules

Gratuity will pay at time of termination of employment either due to retirement, resignation, superannuation, death or disablement. If an employee works below ground for more than 190 days in year is consider as 1 year. If employee works above ground, 240 working days in year is taken as 1 year for gratuity calculation.

If number of days employee has worked in year is less than given above, it is ignored for gratuity payment calculation. For example, if an employee has worked for 4 years and 10 months, duration is considered as 5 years and employee will be eligible for gratuity. On other hand if you have worked for 4 years and 5 month, it is treated as less than 5 year so you are not eligible for gratuity.

Calculation of Gratuity payment

Before starting calculation process, you need to collect important details by getting your last salary slip. Such as Dearness allowance, years tenure, last drawn basic salary. Gratuity calculation is based on salary and number of years of service.

After five years of service, last month basic salary and dearness allowance is first multiplied by 15, then by number of years given in service and afterwards amount is divided by 26 and that is your gratuity. Thus amount received as gratuity is exempted from tax. Check Government reduced PF contribution to 8 percent for New Women Employees 

Formula to get amount is

Is gratuity taxable for employees?

For government employees, entire amount of gratuity received on retirement or death is currently exempted from income tax. In case of non-government employees, income tax rules on gratuity are applicable depending on whether employees are covered under payment of gratuity act or not. Payment of gratuity Act, has divided non-government employees into two categories.

  • Employees covered under Act
  • Employees not cover under Act

For employees covered under Act

There is formula using for gratuity payable and this formula is based on 15 days of last drawn salary for each completed year of service. Here last drawn salary means basic salary, dearness allowance and commission received on sales.

Formula is as follows

Suppose your last drawn basic pay is Rs 60,000 per month and worked with XYZ Ltd for 20 years and 7 months. In this case, using formula above, gratuity will be calculated as. Read Tax-free gratuity has increase limit up to Rs 20 Lakh

(15 X 60,000 X 21)/26 = Rs. 7.26 lakh

For employees not covered under Act

There is no law that restricts an employer from paying gratuity to his employees even if company is not covered under act. Amount of gratuity payable to employee can be calculated based on half month’s salary for each year.

Formula is as follows

As per above mentioned example, if company is not covered under Act, then gratuity will calculated as

(15 X 60, 000 X 20) / 30 = Rs 6 Lakh

Here number of years of service is taken on basis of completed year. So you have worked with company for 20 years and 7 months, then your tenure will be taken as 20 not 21.

As per government’s pensioners’ portal, retirement gratuity is calculated like this one-fourth of  month’s basic pay plus dearness allowance drawn before retirement for each completed six monthly period of  qualifying service. And retirement gratuity payable is 16 times basic pay subject to maximum of Rs 20 lakh.

In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh. Read EPFO advised members do not take out full amount from PF account 

Gratuity Act 2017-Amendment

Under Payment of gratuity act is applicable to all firms like shops, factories, mines, companies etc. It is not applicable for apprentices and persons in civil posts in central and state government who have some other rules apply.

So there’s a good news Central Government has increased tax-free limit for private employees from Rs 10 Lakh to Rs 20 Lakh that is huge benefit for middle & higher management employees. Hope this helps you to understand all about gratuity.

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