Gratuity is a form of monetary benefit that is paid to employees by their employers for services rendered over a period of time. Gratuity rules are governed by the Payment of Gratuity Act, 1972, which applies to organizations that employ 10 or more people. In this blog, we will discuss who is eligible for obtaining gratuity money and the rules governing gratuity payments.
Eligibility for Gratuity
To be eligible for gratuity, an employee must meet the following criteria:
- Completed five years of service: The employee must have completed five years of continuous service with the same employer. In case of death or disablement, this requirement is waived off, and gratuity is paid to the employee or their legal heirs.
- Retired, resigned, or terminated: Gratuity is paid to employees who have retired, resigned, or been terminated due to reasons other than misconduct.
- Not covered under any other gratuity scheme: Employees who are covered under any other gratuity scheme, such as the Employees’ Pension Scheme, are not eligible for gratuity.
Calculation of Gratuity
The amount of gratuity payable to an employee is calculated based on the following formula:
Gratuity equals (Last drawn salary divided by number of years of service divided by 15)/26
In this formula, the last drawn salary refers to the basic salary, dearness allowance, and commission earned by the employee in the last month of service. The number of years of service refers to the total number of years and months of service rendered by the employee. The fraction of a year is rounded off to the nearest full year.The ratio of 15 to 26 is equal to 15 days’ worth of pay for every full year of service., where a year of service is considered to be 240 days.
For example, if an employee has worked for 10 years and 7 months and their last drawn salary is Rs. 50,000, then their gratuity amount would be calculated as follows:
Gratuity = (50,000 x 11 x 15)/26
Gratuity = Rs. 3,26,923.08
Also know about: What is the salary limit for gratuity?
Taxation of Gratuity
Gratuity received by an employee is exempt from tax up to a certain limit. The exempt amount is determined based on the employee’s years of service and the employer’s type of organization.
For employees covered under the Payment of Gratuity Act, 1972, the exempt amount is the least of the following:
- Actual gratuity received
- Rs. 20 lakhs
For employees not covered under the Payment of Gratuity Act, 1972, the exempt amount is the least of the following:
- Actual gratuity received
- Half of one month’s pay for each full year of service
- Rs. 10 lakhs
Any gratuity received in excess of the exempt amount is taxable as income under the head “Income from Salaries” in the hands of the employee.
Gratuity is an important form of monetary benefit that is paid to employees for services rendered over a period of time. To be eligible for gratuity, an employee must have completed five years of continuous service with the same employer and must have retired, resigned, or been terminated due to reasons other than misconduct. The amount of gratuity payable is calculated based on the employee’s last drawn salary and years of service. Gratuity received by an employee is exempt from tax up to a certain limit, beyond which it becomes taxable as income.