Gratuity is the amount that an employer pays to the employees in recognition of their long service and contribution to the company. The payment is made in a lump sum, typically when the employee resigns after completing five years of service, retires, dies, or becomes disabled. Gratuity is governed by the Payment of Gratuity Act of 1972.
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When an employee begins working with a company, they are automatically enrolled in the company's gratuity scheme. The employer either makes direct contributions to the scheme or partners with a life insurance company to handle it. Once the employee completes the required years of service, they are entitled to a one-time lump-sum payment. If the employee leaves before meeting the service requirements, they will not receive the gratuity.
The calculation can be done using the following formula:
(N * B * 15) / 26
Where:
N = Number of years served in the company
B = Last withdrawn basic salary + Dearness Allowance (DA), if applicable
Also read: Invest gratuity funds in FD
Let us understand how to calculate gratuity. Assume an employee has worked with a company for 25 years and earned a basic salary + dearness allowance of Rs. 40,000 per month. The amount earned will be as follows:
Gratuity = 25 x 40,000 x 15/26
= Rs. 5,76,923
Points to note: It is important to note two key points:
If an employer is not covered under the Gratuity Act, they must pay gratuity. For this, the calculation is based on their half-month salary for every year that has been completed. The salary includes basic salary, dearness allowance, and commission (sales-based).
The following formula is considered for employees of an employer who is not covered under the Act:
Eligible Amount = (15 * Last drawn salary amount * period of service) / 30
For instance, if you have worked in a company for 10 years and 8 months and your salary is Rs. 50,000, the calculation will be as follows:
Eligible Amount: (15 * 50,000 * 11) / 30 = Rs. 2.75 lakh
The employee's tenure is considered as one year for calculation purposes. If the number of months worked in the most recent year is less than six months, the previous total for completed years is taken into account.
However, the year is regarded as a full year for calculation purposes if the number of months completed in the most recent year of service is more than six months. You can also use Bajaj Finance Gratuity calculator to calculate your returns in seconds.
In case of an employee’s demise, the eligible amount is calculated based on the tenure of service of the employee. However, the amount is subject to a maximum of Rs. 20 lakh. The table below shows the rates at which the amount would be payable in case of an employee’s death:
Tenure of service |
Eligible amount payable |
20 years or more |
Half of the basic salary for every six-month duration completed. This, however, is subject to a maximum of 33 times the basic salary. |
11 years or more but under 20 years |
20 * the basic salary |
5 years or more but under 11 years |
12 * the basic salary |
1 year or more but under 5 years |
6 * the basic salary |
Less than 1 year |
2 * the basic salary |
When you receive your gratuity, you can invest that amount in a fixed deposit to earn a steady income and secure your financial future.
The taxation procedure depends on the employee receiving the eligible amount. The standard cases for the calculation of gratuity taxable are as follows:
Also read: Invest gratuity funds in FD
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The gratuity benefit is provided to employees for providing their services to a company for 5 years or more. It is the right of every employee and cannot be denied as long as they fall under the eligible criteria. It is a safe and secure way to create a corpus, and you can invest the surplus amount for your future.
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Gratuity in salary is the amount paid by an employer to their employee in return for the services provided to the company. Gratuity applies only to those employees who have worked with the company for five or more years. It is covered under the Payment of Gratuity Act of 1972.
Gratuity is typically extended to employees who have completed at least 5 years of service in the same company. However, the Gratuity Act has a provision that enables employees to avail of gratuity even if their tenure is 4.8 years or less.
Gratuity claimed by government employees is completely tax-free. However, gratuity for non-government employees is only partly exempt from income tax.
Yes, you are entitled to gratuity if you resign, provided you have completed at least five years of continuous service with the employer. The amount will be calculated based on your tenure and last drawn salary.
No, 4 years and 7 months of service does not qualify for gratuity as it requires a minimum of five years of continuous employment with the company to be eligible for the benefit.
Yes, you can withdraw your gratuity once you leave the company, provided you meet the eligibility criteria. The process usually involves submitting a formal request along with necessary documentation to the employer.
Yes, gratuity is compulsory under the Payment of Gratuity Act, 1972, for organizations with more than ten employees. Employers must pay gratuity to employees who have completed at least five years of continuous service.
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