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
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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What is gratuity and how it is calculated
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Is Graduaty based on net Hand cash salary or basic salary?
It is based on basic salary.
basic plus DA
My package is 21000/- per month how can i calculate gratuity per month ..
Hi Ravi, Please confirm if basic salary is calculated for montly/Annual basis?
for example if a monthly basic salary of an assoicate is 7000, Should we consider 84000 while calculating?
We should calculate on monthly basis
My salary is 65,000/- in addition further Rs. 5,000/- also paid monthly as a special allowance. Kindly let me know when computing service gratuity which amount can be taken as my monthly earnings. Is it Rs. 65,000/- OR Rs. 70,000/-
Hi Ravi, Gratuity is computed based basic salary + DA. Is your 65K is only basic + DA. If yes, it would be on Rs 65K. If your salary of 65K includes all other allowances too like HRA, Medical etc., you need to exclude them too
Thank you sir