What is Gratuity & How to Calculate Gratuity in 2017

Gratuity in India is an important component of income but ignored by most people, especially in private sector. The reason is people don’t stick with one company for the long term – another reason is the uncertainty of job. Even “Yours Truly” changed 4 companies before starting Financial Planning firm in 2009. But my partner Vikas was blessed with Gratuity when he left his job & that amount really came handy. In this post, you can also check what is Gratuity, Rules, Gratuity Calculation (you can also download Gratuity Calculator), Rules, Good news that came in 2017 & FAQs 

Check – ESOP Calculation

Gratuity Meaning in Salary

Gratuity is a payment made to an employee by the employer either at the time of retirement or when he is leaving the job.  It is given to the employee once he/she has completed at least 5 years of continuous service. It is mandatory for any employer in the private sector or public sector who has 10 or more employees to pay gratuity to all employees. It is a monetary reward for being in service with the company. It acts like a retirement benefit & become part of post retirement plan.

 

Gratuity

Gratuity Act 2017 – Amendment

The Payment of Gratuity Act was enacted in 1972. The Act is applicable to all establishments – shops, mines, factories, companies etc.  It is not applicable for apprentices and persons in civil posts in Central and State Government who have some other rules apply.

So there’s a good news – Central Government has increased the tax-free limit for private employees from Rs 10 Lakh to Rs 20 Lakh – that’s a huge benefit for middle & higher management employees.

Gratuity Rules

Employees who have completed 5 years of continuous years of service with the employer are eligible for gratuity. It is paid to them at the time of termination of employment either due to retirement, resignation, superannuation, disablement or death

If an employee works below the ground (e.g. mine), every year in which the employee works for more than 190 days in a year, is considered as 1 year. If the employee works above the ground, 240 working days in a year is taken as 1 year for gratuity calculation.

If the number of days the employee has worked in a year is less than prescribed above, it is ignored for gratuity payment calculation. For example, if an employee has worked for 4 years and 10 months, the duration is considered as 5 years and the employee will be eligible for gratuity.  On the other hand if the employee has worked for 4 years and 5 months, it is treated as less than 5 years and no gratuity will be paid.

If an employee expires, gratuity is paid to him for the number of years he worked with the company irrespective of his tenure with the company.

If the employee becomes disabled due to an accident or illness, gratuity is paid to him for the number of years he worked with the company, irrespective of his tenure with the company.

If a person has been terminated from his job due to illegal activities like riot or violence or due to acts that are morally wrong, gratuity is not payable to him.

Calculation of Gratuity

Gratuity calculation formula is based on salary and number of years of service.

For salaried employees, the law states that one should get gratuity equal to 15 days of monthly salary for every completed year of service.

The formula to get the amount is –  Salary * Tenure *15/26

Here,

Salary =  Basic Pay + Dearness Allowance + Commission

Tenure = Number of years of service.

15 – Days for which salary is considered per month.

26 = Number of working days in a month (irrespective of whether you have a 5 day work week or 6 day work week)

For daily wage labourers, gratuity is calculated as Average Wage * 15 * Tenure

Here,

Average Wage – Average daily wage of the labourer for the last 90 days.

Tenure – Number of years of service

Read – LTA Rules & Tax Exemption

Gratuity Taxation Rules 

Gratuity paid to Government sector employees is exempt from Tax.

Gratuity Calculation for Private Company

Gratuity rules for private sector are bit different – Payment of Gratuity Act 1972 gratuity is exempted up to the least of the following –

  • Rs 20,00,000
  • Actual Gratuity received
  • Last drawn salary*15/26*Number of years of service

For private sector employees not  covered by the Payment of Gratuity Act, 1972, gratuity is exempt from tax in the hands of the employee up to the least of the following –

  • Rs, 20,00,000
  • Actual Gratuity received
  • Average salary * (1/2*Number of years of service)

How to calculate Gratuity is very common question on TFL – we have created a simple Gratuity Calculator

Download & Calculate Gratuity

FAQs

1) How can I get Gratuity?

Gratuity has to be paid within 30 days from the date it is payable to the person. If it is not paid within 30 days, the company has to pay simple interest from the date of eligibility till the date of actual payment.

Gratuity can be settled in form of cash, cheque, transfer to account or demand draft.

2) Does a company consider gratuity in CTC?

Some companies make it as part of CTC and some do not mention it as part of CTC.

3) Can an employer pay gratuity more than what is prescribed?

An employer is allowed to pay an amount greater than what is applicable to the employee as gratuity.

4) If an employee has been retrenched from the company for non-performance or cost cutting, will he be eligible for gratuity?

If the employee has completed 5 continuous years of service, he is eligible for gratuity payment.

5) Is the probation period considered in tenure for calculation of gratuity amount?

Yes, probation period can be considered in determining number of years of service.

6) If an employee is transferred overseas on an assignment, will the tenure abroad be considered for for gratuity?

The employee will be on the rolls of the company. So the tenure abroad should be considered for gratuity. If the employee has resigned from the company in India and given a new appointment letter overseas, then gratuity depends on terms of employment.

Gratuity is a usually a substantial amount. It is important to invest it wisely and not squander – that’s why financial planning is so important. Hope this helps you to understand all about gratuity. Do let us know your questions and comments on gratuity.

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21 COMMENTS

  1. I got superannuated on 24.01.2016 with 39 years of service in BHEL a PSU & got Rs. 10 lac as gratuity. Will I now get additional Rs. 10 lacs gratuity

  2. My Father got superannuated on 31 st Jan 2016 from Indian oil corp Ltd with 33 yrs of service. Got rs. 10 lakh. Will he get additional 10 lakh now? Pls reply…

    • Dear sir, no.. you will not receive the double amount (I.e; Rs. 20 L) of gratuity (Rs. 10 L)… The amendment is applied only to avail TAX benefits on gratuity amount..

      • On retirement during/after Jan.2016 from Govt.Corporate body Gujarat Urja Vij Nigam Ltd./DGVCL etc.,diference of the enhanced amount of gratuity amended in 2017 can be payable as per initiation of the Union Cabinate of Sept.,2017.

        amou

  3. After serving for 22 years in an MNC Bank, my role was made redundant and I was released w.e.f 25/12/2015 with 3 months notice pay wef 25/12/2015 to 24/3/2016 and redundancy pay starting 25/3/2016. Am I eligible to get the increase in gratuity which is applicable from 1/1/2016 ?

  4. I have retired from undevided Andhra Pradesh State Financial Corporation on March, 2015. AP Govt. extended retirement age from 58 to 60 years wef. 2.6.14. Supreme Court extended the facility to PSUs also with monitory benefits wef from 2.6.14. Can I claim difference gratuity amount of Rs. 10 lacs ?

  5. Hello Hemant,

    Shailesh Biradar here.

    I have completed 1661 days or 4.55 yrs of service in public limited company, including three months of notice period?

    Will I be eligible for gratuity?

  6. Hello Hemant,

    Thanks for quick response.

    Can I get some official document, for making it as basis for my claim.

    Want to took your paid consultation in this matter.

    Kindly share your contact number

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