# What is gratuity and when is it paid?

Charlotte Miller

Updated on:

Gratuity is the benefit availed under the Payment of Gratuity Act of 1972. This is the money paid to the employee by the employer for services rendered to the organization. This is paid only to employees completing 5 years or higher in the current organization. This is the financial component provided to the employee by employers, recognizing his/her services and contribution to the organisation. It is a portion of the salary received by the employer and is known to be a benefit-based plan, tailored to help the person at the time of retirement. Gratuity is paid once the employee retires or leaves the employment post serving for a minimum time frame of 5 years.

Eligibility Criteria

• Employees should have eligibility for superannuation.
• Employees who are retiring.
• Employee resigns post working for 5 years with one employer.
• Employee, unfortunately, passes away or suffers any disability owing to accident or injury.

Calculation Formula for Gratuity

You can use a specific formula with your gratuity calculator online. There are several components integral for calculating this gratuity amount. The amount also depends upon the number of years served at a particular organisation and the salary that was last drawn.

Gratuity = N*B*15/26

Here, N and B are the number of years of service in the company and last drawn basic salary + DA. Suppose you have worked for two decades with an entity and had the last drawn basic salary of Rs. 25,000 + DA. In this case, the Gratuity Amount will be 20*25,000*15/26 or Rs. 2, 88, 461.54 in total. Yet, employers may choose to pay higher gratuity to employees. For the number of months in the last year of employment, any period above 6 months will be rounded off to the next figure while anything lower than 6 months in the final year of employment will be rounded off to the earlier lower number.

Even if the organisation is not a part of the Act, they may get gratuity likewise. Yet, the calculation will be based on the half month’s salary of the individual for every year that has been concluded. The salary will include sales-based commission and basic salary along with DA (dearness allowance). The formula given below is ideal for calculating gratuity amount for employees without coverage under the Gratuity Amount:

Gratuity Amount = 15 * Last drawn Salary Amount * Period of Service / 30.

For example, if someone has a salary of Rs. 50,000 and has worked at a company for 10 years and 8 months, calculation will be 15*50,000*11 /30 or Rs. 2.75 lakh. The service period of an employee will be considered as an entire year for calculation purposes. If the number of months worked in the previous year is lower than 6 months, then the earlier number of completed years should be considered. Yet, if the number of months completed in the last service year is higher than 6 months, then the year will be taken as a full year for calculation purposes. Hence, the working tenure has been taken as 11 years in this case. If the service period had stood at 10 years and 4 months (anything lower than 6 months), the number of years of service would have been taken as only 10 years.

Government rules stipulate Gratuity Amount as 1/4th of the last-drawn basic salary of the employee for every completed period of 6 months. The retirement gratuity amount is 16 times of the basic salary, subject to a maximum cap of Rs. 20 lakh.

Gratuity Calculation if employee passes away

Gratuity benefits are calculated on the basis of the service tenure of the employee in case of his/her untimely demise. This is subject to the maximum limit of Rs. 20 lakh. Here is the slab for your perusal:

• Less than 1 year of service- 2*basic salary (Gratuity)
• 1 year or more but less than 5 years- 6*basic salary
• 5 years or more but less than 11 years- 12*basic salary
• 11 years or higher but less than 20 years- 20*basic salary
• 20 years or higher- Half of the basic salary for every 6-month period that is completed and subject to a maximum threshold of 33 times the basic salary.

Some other key aspects worth noting

• The ceiling has been increased to Rs. 20 lakh from Rs. 10 lakh in terms of tax-free gratuity for private-sector employees. This was done for Central Government employees post the implementation of the 7th Pay Commission.
• The Government is reportedly planning to offer a gratuity payment facility post completing one year of service applicable for fixed-term employees of any firm in light of the recent pandemic and its implications.
• Employees can get gratuity higher than Rs. 10 lakh from the employer and tax exemption will be calculated likewise. The tax-free threshold of gratuity was scaled up to Rs. 30 lakh by the Interim Budget of 2019.
• Employers have the right to reject gratuity payment to employees leaving the job owing to misconduct.
• For the death of the employee, his/her nominee/heir will get the gratuity amount. The taxes will be calculated on the basis of income from other sources.