According to the Payment of Gratuity Act, 1972, gratuity is a lump sum payment from the employer to the employee as a gratitude for their services. However, gratuity can only be received on retirement, resignation after five years of service, or death/ disablement. Gratuity calculation can be complex. That’s why here we have explained all the scenarios with examples.
Note: Gratuity can also be given if the employer is not covered under the Payment of Gratuity Act.
Eligibility Criteria To Be Applicable For Gratuity
The few conditions when you are eligible for gratuity are:
- The employee is eligible for superannuation.
- The employee retires
- The employee resigns after working for the same employers for a minimum of five years.
- The employee passes away or gets disabled due to an illness or accident.
Gratuity Calculation In All The Scenarios
#1: If The Employer Is Covered Under Gratuity Act
If Employee Retires or Resigns After At Least 5 Years
If the employer is abided by law to pay gratuity to the employee. And the employee has provided services for the employer for at least five years then,
The gratuity calculation formula:
(15 * Your Last Drawn Salary plus DA * Number of Years Of Service) / 26
Example:
Say, the employee worked for 15 years and their last drawn salary was ?50,000. Then,
Gratuity = (15 * 50,000 * 15) / 26 = ?4,32,692.30
If Employee Gets Disbaled Or Dies Unfortunately
Again, if the employer is law abided to pay gratuity to the employee, it unfortunately dies or gets disabled. Then,
The gratuity calculation formula:
| Tenure Service | Gratuity Payable |
| Less Than A Year | 2 * Basic Salary |
| 1 Year < x < 5 Years | 6 * Basic Salary |
| 5 Years < x < 11 Years | 12 * Basic Salary |
| 11 Years < x < 20 Years | 20 * Basic Salary |
| 20 Years or more | Half of the Basic salary of each completed six months. However, it can range to a max of 33 times the basic. |
Example:
Say the employee worked for 24 years and six months, and the basic plus DA is ?50,000. Then,
Gratuity = (1/2 * 50000 * 49) = ?12,50,000
#2: If The Employer Is Not Covered Under Gratuity Act
If the employer is not covered under the gratuity act but still decides to pay gratuity to the employees, it is calculated on half the month’s salary.
The formula:
(15 * Your Last Drawn Salary plus DA * Number of Years Of Service) / 30
Example:
Say, the employee worked for 20 years and the salary plus DA is again ?50,000. Then,
The gratuity calculation formula = (15 * 50,000 * 20) / 30
= ?5,00,000
Taxation Rules For Gratuity
Taxation rules applicable to gratuity according to the following categories:
#1: Government Employee Is Receiving The Gratuity
If the employee worked in central government, state government, or local authority, the whole gratuity amount is tax-exempt.
#2: Any Other Salaried Individual But Covered Under Gratuity Act
In this case, 15 days’ worth of last month’s salary is tax-exempt.
#3: Any Other Salaried Individual But Not Covered Under Gratuity Act
In this case, the least of the following is tax-exempt:
- ?10 Lakh
- Received gratuity amount
- Half a month’s salary each year the employee has worked for the employer.
Also Read: How To Calculate Gratuity?
Tax Exemption Rules On Gratuity
- According to Article 10(10) in the IT Act, gratuity received by the government employee is fully tax-exempt.
- Article 10(10)ii of the IT Act says that if the employee receives gratuity in case of death or disablement and is covered under the Gratuity Act, then the least of the following is tax-exempt:
- 15/26 * Last Drawn Salary plus DA * Completed number of years or part thereof above six months.
- ?20 Lakh
- Actual gratuity received
A Few Key Points About Gratuity
- Gratuity payment above ?10 Lakh comes under the taxation rules explained above.
- The employer owns the right to reject payment of gratuity if the employee is fired due to misconduct or physically harming any of the employees.
- If the gratuity payment is made because of the employee’s death, then the amount is payable to the nominee or heir of the employee. Also, in this case, the taxation is done under the head, income from other sources.
