Employees who dedicate years of service to a company naturally expect some reward for their loyalty and commitment. One of the key benefits offered in India is gratuity. It acts as a financial gesture from employers towards staff who have served for at least five years. Governed by the Payment of Gratuity Act, 1972, this payment is intended to support employees as they step into retirement or when their service with the organisation comes to an end.
Moreover, grasping the nuances of gratuity eligibility is indispensable for employees who are planning their long-term financial security. Consider, for instance, individuals managing substantial financial commitments like a home loan. For them, knowing their gratuity eligibility becomes integral to effective financial planning. It allows them to seamlessly integrate future financial benefits and obligations into their overall financial strategy.
When planning major life investments like buying your dream home, understanding your gratuity benefits helps you make informed financial decisions. With Bajaj Finserv offering competitive rates starting from 7.45%* p.a and loans up to Rs. 15 Crore*, you can plan your home purchase with confidence. Check your home loan eligibility today. You may already be eligible, find out by entering your mobile number and OTP.
This handy guide aims to provide comprehensive insights into what is gratuity, criteria for gratuity eligibility, covering key aspects such as eligibility conditions, calculation methods and formula, and procedural requirements.
What is gratuity?
Gratuity is a lump sum amount that an employer pays to employees in recognition of their long-term service. According to law, any employee completing five continuous years in an organisation becomes eligible for this benefit. While usually paid on retirement, it can also be provided during employment under certain circumstances. The Payment of Gratuity Act, 1972, covers factories, plantations, ports, mines, railways, and establishments with at least 10 workers. Organisations outside its scope may also voluntarily offer gratuity. The scheme is meant to ensure financial stability for employees after their working life ends.
Gratuity eligibility criteria
The Payment of Gratuity Act sets clear rules on who qualifies for gratuity. To be eligible, an employee must have completed a minimum of five continuous years of service with the same organisation. However, gratuity becomes payable in the following cases of employment termination:
- Superannuation: When an employee reaches the age of retirement.
- Retirement or resignation: Voluntary exit from service.
- Death: In such cases, the payment is made to the nominee or legal heir.
- Disablement: If an employee is permanently disabled due to illness or accident.
It is important to note that the five-year service condition does not apply in situations of death or disablement. In these cases, gratuity must still be paid to the employee’s family or to the employee themselves. Employers covered under the Act are legally bound to honour these provisions, ensuring that employees and their families receive financial support when most needed.
Gratuity calculation – What is the formula for calculating the gratuity?
The calculation of gratuity depends on whether the employee falls under the Payment of Gratuity Act, 1972. The formula differs slightly for those covered and those not covered by the Act.
For employees covered under the Act
Gratuity = (Last drawn salary × Years of service × 15) ÷ 26
Here:
- Last drawn salary includes Basic Salary + Dearness Allowance
- Years of service refers to completed years of employment
- 15/26 represents 15 working days out of 26 in a month
Example:
Shiby earns Rs. 75,000 (Basic + DA) monthly at XYZ firm and has served 7 years.
Gratuity = Rs. 75,000 × 7 × 15/26 = Rs. 4,03,846 (approx.)
For employees not covered under the Act
Gratuity = (Average salary of last 10 months × Years of service × ½)
Example:
Sabita earns between Rs. 40,000 and Rs. 45,000, averaging Rs. 42,500 over 10 months, and has served 12 years.
Gratuity = Rs. 42,500 × 12 × ½ = Rs. 2,55,000
These formulas may look complex, but an online gratuity calculator can instantly provide accurate results. Employees like Alice and Priyank found it much easier using such tools, as they avoid manual errors and save time. Anyone planning their retirement or career change can use these calculators to estimate their entitlement quickly.
Just as calculating your gratuity helps plan your financial future, knowing your home loan eligibility is crucial when considering property investment. Bajaj Finserv offers home loans with flexible tenures up to 32 years and EMIs starting at just Rs. 684/lakh*. Check your loan eligibility and discover how much you can borrow for your dream home. You may already be eligible, find out by entering your mobile number and OTP.
What are the advantages of using a Gratuity Calculator?
A gratuity calculator is a simple yet powerful tool that saves both employees and employers a great deal of effort. Here are some of the major advantages:
- Accuracy in calculations: Manual computation of gratuity involves multiple steps and is prone to human error. A calculator ensures precise results without the risk of miscalculation.
- Saves time and resources: For large organisations with many employees, manually working out gratuity is time-consuming. A calculator delivers results instantly, reducing paperwork and workload.
- Uniform and consistent results: By standardising the formula, calculators give consistent results across employees, ensuring fairness in payouts. This prevents disputes and builds trust between employers and staff.
- Legal compliance: Most gratuity calculators are aligned with the Payment of Gratuity Act and relevant tax laws. This helps employers stay compliant with regulations, reducing the risk of penalties or litigation.
Overall, a gratuity calculator is a valuable aid for financial planning. For employees, it clarifies how much they can expect after years of service, helping them plan retirement or future investments. For employers, it reduces administrative strain and ensures they remain transparent and fair in handling employee benefits.
Documentation and process
To claim gratuity, an employee or their nominee must submit a formal application to the employer. The following documents are generally required:
- Gratuity claim application
- Service certificate
- Identity proof
- Address proof
- Bank account details
Once the application is submitted, the employer is required to process the claim and disburse the gratuity amount within 30 days. If the employer fails to pay the gratuity, the employee can file a complaint with the controlling authority under the Payment of Gratuity Act.
Legal rights and protections
Employees are entitled to several legal rights and protections under the Payment of Gratuity Act, 1972, including:
- Timely payment of gratuity
- Interest on delayed gratuity payment
- Protection against wrongful denial of gratuity
- Legal recourse in case of disputes
Tax implications of gratuity
The Income Tax Act, 1961, under Section 10(10), provides tax relief on gratuity. The exemption depends on the employee’s category and whether the employer falls under the Payment of Gratuity Act.
Relevant section |
Category of employees |
Maximum exemption limit |
Relevant period |
Section 10(10)(ii) |
Employees covered under the Payment of Gratuity Act |
Rs. 20,00,000 |
For retirements, resignations, or other cases on or after 29th March 2018 |
|
|
Rs. 10,00,000 |
For cases prior to 29th March 2018 |
Section 10(10)(iii) |
Employees not covered under the Act |
Rs. 20,00,000 |
For cases on or after 29th March 2018 |
|
|
Rs. 10,00,000 |
For cases prior to 29th March 2018 |
Points to remember:
- The exemption applies only to the least of these: actual gratuity received, gratuity calculated under the Act, or the maximum exemption limit.
- Any gratuity amount beyond the exempted limit is taxable as per the employee’s income tax slab.
- For government employees, gratuity is fully exempt from tax.
