What is Gratuity in India? is an important component of income but is ignored by most people, especially in the 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 a Financial Planning firm in 2009. But my partner Vikas was blessed with Gratuity when he left his job & that amount really came in handy. In this post, you can also check what is Gratuity, Rules, Gratuity Calculation of gratuity in India (you can also download Gratuity Calculator), Rules, Good news that came in 2021 & FAQs
What is Gratuity 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 as a retirement benefit & becomes part of a post-retirement plan.
Check – ESOP Calculation
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 governments who have some other rules apply.
So there’s 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.
What are 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 calculation.
If the number of days the employee has worked in a year is less than prescribed above, it is ignored for 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, an Amount 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 In India
The Calculation of gratuity in India formula is based on salary and number of years of service.
For salaried employees, the law states that one should get a 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
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 days work week)
For daily wage labourers, gratuity is calculated as Average Wage * 15 * Tenure
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 the private sector are a 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 a very common question on TFL – we have created a simple Gratuity Calculator
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 the 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 the calculation of gratuity amount?
Yes, a 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 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 the terms of employment.
Gratuity is 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.