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What is gratuity and how it is calculated What is gratuity and how it is calculated?

Gratuity is the form of gratitude provided to employees in monetary terms for services rendered to the company. It is the important form of social security benefit provided as per Gratuity Act. Employees would get benefitted through Gratuity when they stay longer period in a company. In this article I would detail about what is gratuity, who is eligble for gratuity payment, how it is computed and how gratuity is taxed.

Who is eligible for gratuity payment?

An employee is eligible for gratuity, if he/she has completed 5 years of complete service with the company. However in case an employee expires, this 5 years is relaxed and he would be paid for every 1 year completed service. Please note that company need to have at least 10 employees so that they can pay gratuity to eligible employees.

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When is gratuity payable or paid?

Eligible employees would be paid gratuity in case of resignation, retirement or superannuation or death.

How Gratuity is computed?

Gratuity is paid for 15 days of every completed year of employment after 5 years of service. If you have worked for more than 6 months in a year, it would be treated as 1 completed year. Means if you worked for 5 years 6 months, you are eligible for 6 years gratuity. However if you worked for 5 years 5 months, you are eligible only for 5 years gratuity. Below is the method of computation

  • Gratuity paid for 15 days for every completed year of service
  • Your last drawn basic salary + DA will only be considered for computation
  • Number of working days would be considered as 26.

                                    15 days x no. of years completed

Gratuity payable =      ——————————————-

                                                26 (working days)

e.g. if you have basic salary + DA as Rs 40,000 per month and you worked for 5 years 6 months which is equivalent to 6 years. Below is the computation of gratuity.

                   15 x Rs 40,000 x 6 (years)

Gratuity =    ——————————– = Rs 138,641

                                26

Tax treatment for gratuity income

For the purpose of gratuity taxation, employees are divided into 3 categories. Govt employees, other employees who are covered under payment of gratuity act and other employees who are not covered under payment of gratuity act.

a) Govt employees: Gratuity is fully exempted from tax for all Government employees.

b) Other employees who are covered under payment of gratuity act: Least of the following is exempted from income tax

  • 15 days of salary for every completed year of service (Including part there-of)
  • Rs 10 Lakhs
  • Actual gratuity received

Illustration : An individual who has Rs 40,000 as basic + DA per month and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 6 x 15/26 = Rs 138,641

c) Other employees who are NOT covered under payment of gratuity act: Least of the following is exempted from income tax

  • Half month average salary for every completed year of service (average salary is arrived for the basic salary+ DA received in the last 10 months). Part of the year would be ignored
  • Rs 10 Lakhs
  • Actual gratuity received

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Illustration : An individual who has Rs 40,000 as basic + DA per month in the last 10 months and who has finished 5 years and 6 months would get gratuity Rs 40,000 x 5 x 15/26 = Rs 115,384

In case an employee has claimed gratuity exemption earlier, the amount would be reduced from current amount and maximum eligible exemption would be Rs 10 Lakhs only.

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Suresh
What is gratuity and how it is calculated

103 comments

  • Vikram Singh

    Dear Sir,

    My joining date is 01/08/2011 & Leaving date is 06/09/2016.
    I joined as a Trainee Engineer for a period of one year & their after confirm as Engineer.
    I want to know that may i eligible for gratuity claim or not.

  • WASI AQEEL ZAIR

    HI,

    JUST WANT TO CLARIFY 

    IN CALCULATING THE NUMBER OF DAYS (LEAVW WITHOUT PAY / ABSENTISM IS EXCLUDED?

  • Nakka Naveen

    Dear sir my date of joing is 01-04-2011 and my last working day was 14-10-2015. I am eligible or not for gratuity.

  • SANE S G

    I AM WORKING IN CO-OP BANK. I HAVE HEARD THAT GRATUITY AMOUNT IS INCRESED FOR EMPLOYEES COVERED UNDER 7TH PAY COMMISSION, WHICH IS NOT APPLICABLE TO ME. OUR INSTITUTION

    IS PAYING 10 LACKS TO EVERY EMPLOYEE, CAN THIS BE APPLICABLE TO US?

  • Vijay saraswat

    Dear sir my joining date is 5/08/2010 and my last working day was 18 /08/2016 ,last basic salary given by the employer is 2200 + hra 2200 they offer me gratuity promice 57692 is it correct promice if not please tell me the correct amount & how we calculate the year promice service

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