Gratuity

Gratuity: What is Gratuity? How to calculate Gratuity?

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What is meant by Gratuity?

What is Gratuity? Gratuity is the lump sum amount which the company pays to an employee for his/her service to the company. Some employees work in a company for several years, and those employees get a reward, which is gratuity. The company pays gratuity to an employee at the time of retirement, or one can ask the gratuity while moving to another company after serving for 5 years. So, the gratuity meaning is a reward or tip to an employee.

 What is the Gratuity Act?

Gratuity Act is also known as the Payment of Gratuity Act, 1972, that came to act in September 1972. The main aim of this act is to help an employee with a lump sum amount, who has serviced the company for several years with great hard work. This act applies to all organizations and industries in India but, include terms and conditions under Gratuity act rules. This act covers employees working in various fields such as

  • Factories
  • Mines
  • Plantations
  • Oil fields
  • Ports
  • Companies
  • Shops
  • Railway Companies
  • Other related establishments having more than ten employees at work.

 Gratuity Rules

Gratuity Rules in India includes employees of two categories such as

  1. Employees covered by the Payment of Gratuity Act, 1972
  2. Employees who are not covered by the Payment of Gratuity Act, 1972

Based on the Gratuity rule in India, companies or industries having more than 10 or more employees will come under the first rule i.e. employees covered by the Payment of Gratuity Act, 1972.

The State and Central Government employees of India will come under the second rule, i.e. employees who are not covered by the Payment of Gratuity Act, 1972. Here the employees have different service rules for payment of gratuity.

 Gratuity Eligibility

The following points are the gratuity eligibility rules to receive a lump sum amount.

  1. Retired employees
  2. An employee moves to another job after working for 5 years in a company under a single employer
  3. In the event of the death of an employee due to illness or accident
  4. If the employee suffers from disability due to a sudden accident
  5. An employee should be eligible to receive gratuity under superannuation
 Continuous Service  Number of working days
Consider 1-year of continuous service It means 190 days in an establishment, so working less than 6 days in a week. In other cases, the number of days is 240
Consider 6 months of continuous service

 

It means 95 days in an establishment, so working less than 6 days in a week. In other cases, the number of days is 120
Consider as continuous employment In this case, an establishment may be open for not less than 75% of days, which means a seasonal employment

 Gratuity Formula

You may doubt how to calculate gratuity, it is calculated based on the Payment of Gratuity Act, 1972. The gratuity calculation depends on the 15 days’ wages amount for every year of your service. Here the salary considered is the last drawn salary of an employee. Thus, the gratuity formula to calculate the gratuity amount is:

Total Gratuity = (Last Drawn Monthly Salary)*(15/26)*(Number of years served in a company)

For instance, if you started to work in a company in 2013, and resigned your job in 2018. Then, the gratuity formula is as follows.

Monthly Salary = Rs. 50,000

Gratuity = (50,000)*(15/26)*5 = Rs. 1, 44,230.

The above gratuity calculation formula will help you if you don’t know how to calculate gratuity amount.

Gratuity Calculator

The other name for Gratuity Calculator is the Taxable Gratuity Calculator. This calculator is an online tool that helps you in calculating gratuity as well as the gratuity taxable amount. To estimate the amount of money at your retirement, or after completing several years in a company, this gratuity calculator online tool helps you the most. This is because the gratuity payout varies for employees based on some factors. For those, what is gratuity in salary amount can make use of this calculator.

Calculation of Gratuity

The gratuity calculation in India is of two categories of calculations such as

Category 1: Employees who are coming under the Gratuity Act

Category 2:  Employees who are not coming under the Gratuity Act

These two categories are crucial, as they cover both the government and private employees.

Category 1: Employees coming under the Gratuity Act

Here there are two important parameters include the last drawn salary and the number of years of service. Now, here is the gratuity calculation formula

Gratuity = (Last Drawn Monthly Salary)*(15/26)*(Number of years served in a company)

26 days means the number of working days in a month.

15 days means the amount of the wages of an employee to do gratuity calculation.

The last drawn salary is based on the following components to calculate it without missing any of these components.

  1. Basic pay
  2. Dearness Allowance (DA) for Government employees
  3. Sales commission

For instance, if you get your last basic pay as Rs. 80,000 with 10 years of service in a company, then the gratuity calculation is

Gratuity = 80,000 * (15/26) * 10 = Rs. 4.62 lakhs

Category 2: Employees not coming under the Gratuity Act

You can get a gratuity amount even if your company is not under the act. Here, the number of working days changes to 30 from 26.

Gratuity = (Last Drawn Monthly Salary)*(15/30)*(Number of years served in a company)

30 days means the number of working days in a month.

Consider the same example, if you get your last basic pay as Rs. 80,000 with 10 years of service in a company, then the gratuity calculation is

Gratuity = 80,000 * (15/30) * 10 = Rs. 4.00 lakhs

For employees under the act, the denominator value is low. So the employees can get a high gratuity amount when compared to another category.

Nomination under Gratuity

After completing one year of service in a company, an employee can make a nomination for receiving a gratuity. The nominee must be one of his/her family members. Considering nominee in favor of another person, who is not a family member, will result in canceling the gratuity.

In the event of the death of the nominee before the employee’s death, the interest rate of the gratuity will go back to the employee. In such a situation, an employee can choose a new nominee from his/her family. To choose a new nominee, the employee needs to fill the Form F.

Payment of Gratuity by the Employer

An employer of the company must pay the gratuity amount to an employee within 30 days from the date of billing of the gratuity amount. However, if the employer fails to pay the amount within 30 days, then the amount becomes payable along with the interest amount. The interest rate depends on the rules of government, and the interest starts to count after the 30 days.

Another note is that an employee receives the gratuity amount as cash unless an employee or nominee requests for a cheque or demand draft.

Payment of Gratuity in case of Death of an Employee

In the event of the death of an employee, the gratuity amount should be as follows.

 Number of years of service   Gratuity Amount
Service is less than 1 year 2 times the basic pay (2*BP)
Service is more than 1 year but less than 5 years 6 times the basic pay (6*BP)
Service is more than 5 years but less than 11 years 12 times the basic pay (12*BP)
Service is more than 11 years but less than 20 years 20 times the basic pay (20*BP)
Service is more than 20 years

 

The maximum amount is 33 times the basic pay.

Deductions from Gratuity Amount

If the employer terminates an employee on account of causing damage to the employer’s property or other act of negligence or any act of wrongdoing to the employer, then the gratuity amount decreases to the amount. This reduced amount is the original gratuity amount subtracted by the total damage or loss value. So, employers should open insurance from Life Insurance Corporation to manage the damage or loss amount under the payment of gratuity act.

Forfeiture in Gratuity

The employer has the right to forfeit the gratuity payment; even the employee has the service of 5 or more than 5 years. The employer can charge the penalty amount to be a partial amount or the whole amount of gratuity. The reason for the employer to forfeit the gratuity payment includes the following:

  • An employee’s lawless act
  • Violent behavior of the employee
  • An employee’s disorderly conduct
  • An employee’s violent offense act like moral turpitude

When an employee commits any one of these offenses, then the employer can forfeit the gratuity.

Maximum Gratuity Limit

The gratuity exemption limit is Rs. 20 lakhs for an employee. This is the maximum amount covered under the payment of gratuity act, 1972. The gratuity tax-free limit applies to the entire working life of an employee. In case, if an employee is getting multiple gratuity payments, then the total tax exemption limit is Rs. 20 lakhs. This does not depend on the number of times of paying the gratuity.

Taxation on Gratuity

The taxation rules for gratuity in salary depends on the type of employee, here we will discuss it in brief.

Government Employee Receiving Gratuity Amount

In this case, an employee working under the state government or central government, then the total gratuity amount free from income tax.

Gratuity amount paid to an employee cover under the Payment of Gratuity Act, 1972

In this case, an employee receives a gratuity amount under the gratuity act. But here, the last 15 days salary amount exempts from tax.

Gratuity amount paid to an employee not covered under the Payment of Gratuity Act, 1972

In this case, an employee receives a gratuity amount and it depends on three amounts that are exempt from tax.

  • 10 lakhs
  • Actual gratuity amount that an employee receives
  • The half monthly salary of the employee for every year

But now, according to gratuity act 2019, then exemption limit raises to Rs. 20 lakhs from Rs. 10 lakhs.

Employee category   Tax-Free Amount
Government Employee Whole gratuity amount tax-free
An employee covers under the Payment of Gratuity Act, 1972 Last 15 days salary is tax-free
An employee not covers under the Payment of Gratuity Act, 1972 Rs. 20 lakhs tax exemption limit

New Gratuity Rules 2019

According to the gratuity rules 2019, the limit of gratuity raises to Rs. 20 lakhs. This new rule covers various things such as

  1. Gratuity calculator formula 2019 = Last drawn salary * service years * (15/26)
  2. New Gratuity limit = Rs. 20 lakhs
  3. Gratuity eligibility = 5 years of services in an organization
  4. Gratuity becomes mandatory

One can even make a gratuity calculation in excel for easy understanding.

How to Download the Gratuity Application?

To download the application form for receiving a gratuity, you need to get the below forms.

  • An employee (Form I)
  • For nominee of the employee (Form J)
  • For legal heir of the employee (Form K)

Once you fill the gratuity form, you need to submit it to the appropriate authorities in your company. This will enable the employer to start working for your gratuity payment.

The Bottom Line

Since the government has made the gratuity compulsory for all organizations; it is much helpful for employees to receive a good lump sum amount at the time of retirement or moving to another job. Follow the gratuity rules to receive your gratuity payment without any hassle.

 FAQs on Gratuity

Q1: Which salary amount is used to calculate gratuity?

Ans: To calculate gratuity, the last drawn salary of an employee is taken into account.

Q2: How much percentage that one can receive monthly for gratuity?

Ans: One can receive 57.69% of the monthly payment as a gratuity. Use the gratuity calculation 2019 formula to know the exact percentage.

Q3: How much amount of gratuity is exempt from tax?

Ans: The maximum gratuity exemption limit is Rs. 20 lakhs for an employee.

Q4: Can an employee get excess gratuity from the employer?

Ans: Yes, an employee can get excess gratuity from the employer. But this excess amount applies to income tax.

Q5: What is the gratuity formula?

Ans: The formula for gratuity is (15 * last drawn monthly salary * service years) divided by 26. Here, 26 is the number of working days in a month.

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