Gratuity: Eligibility, how to calculate, income tax exemption and other details
Employers not covered under the Payment of Gratuity Act 1972 Act can also pay gratuity to their employees Gratuity received by a government employee is fully exempt
Gratuity is a lump sum amount paid by an employer to its employee when she leaves the company after completing a minimum of five years. An employee is eligible to receive the gratuity payment in case she resigns, retires or on her superannuation, provided there is no gap in her employment in those five years of her service in the company. Gratuity payment is governed by The Payment of Gratuity Act 1972.
According to the Act, every factory, mine, oilfield, plantation, port and railway company or shop in which ten or more persons are employed, or were employed, on any single day of the preceding 12 months has to compulsorily pay gratuity to its eligible employees. Employers not covered under this act may also pay gratuity.
Who is eligible?
An employee who has completed a minimum of five years of continuous service in the same organisation is eligible to receive gratuity from the employer. An employee who becomes disable due to sickness or an accident, whether or not she has completed hr five years service with that employer is also eligible to receive the gratuity.
How is gratuity calculated?
The gratuity calculation for those who are covered under the Payment of Gratuity Act 1972 and those who are not covered under the act differ slightly. Here is how it goes:
- For employees covered under the Payment of Gratuity Act 1972
Gratuity = (15 x last drawn salary x number of years of service) / 26
;where, the last drawn salary includes basic and dearness allowance (DA)
For instance, an employee’s last drawn salary was R 75,000 (Basic salary + DA) and she has worked with an organisation for 10 years and 7 months, her gratuity will be calculated as below.
= (15 X 75,000 X 11) /26 = ₹4,75,962
For the calculation of number of years completed in service, we have to round off the number of completed years to the nearest full year. Had it been 10 years and five months, we would have assumed 10 years for the calculation.
- For employees not covered under the Act
Gratuity = (15 x last drawn salary x number of years completed in service) / 30
Taking the same example, the employee will receive gratuity worth
=(15 X 75,000 X 10) / 30 = ₹3,75,000
For the calculation of number of years in service, we have to take number of years completed. The actual duration of employment with that employer was 10 years and seven months but for the calculation, we can take only 10 completed years.
How is gratuity taxed?
Gratuity received by a government employee is fully exempt
For a non-government employee, the least of the following is exempt from tax:
- Eligible gratuity amount (as calculated using the formulas mentioned above)
- ₹20 lakh
- Gratuity actually received
Any sum over and above the tax exempted gratuity amount will be taxed as per the employee's applicable tax slab rate.
Who receives gratuity if an employee dies?
The deceased employee’s nominee shall receive the gratuity if the employee dies. The condition of minimum tenure of completion of five years of service does not apply here. If the nominee is a minor, the gratuity sum would be deposited with the controlling authority who shall invest the money for the benefit of the minor until the minor attains majority.