Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. But, gratuity is paid only to employees who complete five or more years with the company. Gratuity is a benefit that is payable under the Payment of Gratuity Act 1972. employee in recognition of his/her service rendered to an organisation. It is a part of the salary an employee receives and can be viewed as a benefit plan designed to aid an individual in his/her retirement. Gratuity is paid by an employer when an employee leaves the job after serving the same organisation for a minimum period of 5 years. One can consider it to be a financial “Thank you” to an employee for rendering continuous service to an employer. When you will be eligible to receive gratuity. An employee should be eligible for superannuation An employee retires An employee resigns after working for 5 years with a single employer An employee passes away (Death) or suffers disability due to illness or accident How to Calculate Listed below are the components that go into the calculation of the gratuity amount. The amount is also dependent upon the number of years served in the company and the last drawn salary. Gratuity = N*B*15/26 N = number of years of service in a company B = last drawn basic salary plus DA Tax Exemptions on Gratuity According to Section 10 (10) in the Income Tax Act, any gratuity received by government employees, apart from statutory corporations, is fully exempt of tax. According to Section 10 (10) (ii) of the Income Tax Act, death and retirement gratuity receivable by an employee covered under Gratuity Act 1972 is the least amount of the following that is exempt from tax: (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months. Rs.20 lakh. Gratuity amount that is actually received. * 7 days in case an individual is an employee of a seasonal establishment. ** Salary amounts to the total salary received by an employee including Dearness Allowance and excluding any other benefits like bonus, HRA, commission, and any other such perquisites. According to Article 10 (10) (iii) of the Income Tax Act, exemption for gratuity amount received by individuals who are not covered under Gratuity Act of 1972 are as follows: Half month’s Average Salary* X Completed years of service Rs. 10 lakhs Gratuity actually received. *Average salary = Average Salary of last 10 months immediately preceding the month of retirement ** Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission

1. Gratuity
 Gratuity is a sum of money paid by an employer to
an employee for services rendered in the company.
But, gratuity is paid only to employees who complete
five or more years with the company.
 Gratuity is a benefit that is payable under the
Payment of Gratuity Act 1972.

2. What Is Gratuity in Salary?
 Gratuity is a financial component offered by an
employer to an employee in recognition of his/her
service rendered to an organisation. It is a part of the
salary an employee receives and can be viewed as a
benefit plan designed to aid an individual in his/her
retirement.
 Gratuity is paid by an employer when an employee
leaves the job after serving the same organisation
for a minimum period of 5 years. One can consider it
to be a financial “Thank you” to an employee for
rendering continuous service to an employer.

3. Gratuity Eligibility
When you will be eligible to receive gratuity.
 An employee should be eligible for
superannuation
 An employee retires
 An employee resigns after working for 5 years
with a single employer
 An employee passes away (Death) or suffers
disability due to illness or accident

4. How to Calculate
Listed below are the components that go into the calculation of the gratuity amount. The
amount is also dependent upon the number of years served in the company and the last
drawn salary.
 Gratuity = N*B*15/26
 N = number of years of service in a company
 B = last drawn basic salary plus DA
How to Calculate Gratuity?
 For example, Amit has worked with a company for 20 years and had Rs.25,000 as his
last drawn basic plus DA amount, then,
 Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54
 However, an employer can choose to pay more gratuity to an employee. Also, for the
number of months in the last year of employment, anything above 6 months is
rounded off to the next number while anything below 6 months in the last year of
employment is rounded off to the previous lower number.
Calculation of Gratuity for the Employees Who Are Not Covered under the Gratuity
Act
 Even if the organisation is not part of the Act, they can pay gratuity. However, the
calculation of gratuity is based on an individual’s half month’s salary for every year
that has been completed. The salary includes commission (sales-based), dearness
allowance, and basic salary.
 The following formula is considered for the calculation of gratuity amount for

5. For Example:
 For example, if you have at a company for 10 years and 8 months and your salary is Rs.50,000,
the calculation of the gratuity amount is done as follows:
 Gratuity Amount: (15 * 50,000 * 11) / 30 = Rs.2.75 lakh.
 The period of service of an employee is taken as a whole year for the calculation. In case the
number of months worked in the last year is less than 6 months, the previous number of
completed years is considered. However, if the number of months completed in the last year of
service is more than 6 months, the year is considered to be a full year for the purpose of
calculation. Thus, the working tenure has been considered as 11 years. If the service period
had been 10 years and 4 months (or anything less than 6 months), the number of years of
service would have been considered as 10 years only.
 As per the rules recorded on the pensioner’s portal of the government, the amount of gratuity at
the time of retirement is calculated as follows:
 Gratuity Amount is equal to one-fourth of the last-drawn basic salary of an employee for each
completed six-month period. The retirement gratuity amount which is payable is 16 times the
basic salary. However, it is subject to a cap of Rs.20 lakh.

6. Calculation of Gratuity in Case of
Death of an Employee
In case of the death of an employee, the gratuity benefits are calculated based
on the tenure of service of the employee. The amount is, however, subject to a
maximum of Rs.20 lakh. The following table shows the rates at which the
gratuity will be payable in case of death of an employee:

7. Tax Exemptions on Gratuity
 According to Section 10 (10) in the Income Tax Act, any gratuity received by government
employees, apart from statutory corporations, is fully exempt of tax.
 According to Section 10 (10) (ii) of the Income Tax Act, death and retirement gratuity
receivable by an employee covered under Gratuity Act 1972 is the least amount of the
following that is exempt from tax:
 (*15/26) X Last drawn salary** X completed year of service or part thereof in excess
of 6 months.
 Rs.20 lakh.
 Gratuity amount that is actually received.
 * 7 days in case an individual is an employee of a seasonal establishment.
 ** Salary amounts to the total salary received by an employee including Dearness
Allowance and excluding any other benefits like bonus, HRA, commission, and any other
such perquisites.
 According to Article 10 (10) (iii) of the Income Tax Act, exemption for gratuity amount
received by individuals who are not covered under Gratuity Act of 1972 are as follows:
 Half month’s Average Salary* X Completed years of service
 Rs. 10 lakhs
 Gratuity actually received.
 *Average salary = Average Salary of last 10 months immediately preceding the month of
retirement ** Salary = Basic Pay + Dearness Allowance (to the extent it forms part of
retirement benefits) + turnover based commission

8. Gratuity Rules
 Forfeiture of Gratuity
 According to the Payment of Gratuity Act of 1972, an employer
holds the right to forfeit their gratuity payment, either wholly or
partially despite the employee having completed 5 and more
years of service in a company. The only situation where this
works is when the employee has been terminated due to
disorderly conduct wherein, he/she tries to physically harm
individuals during his/her employment.
 Timeline for Gratuity payment
 There are three steps involved regarding gratuity payment.
These include:
 Initiation: An individual or a person authorized (HR dept) must
send in an application to an employer regarding the gratuity
he/she is owed by a company.
 Acknowledgement and calculation: As soon as the
application is received, the company which owes gratuity will
calculate the amount and also provides a notice of the same to
the individual and the controlling authority with the amount
specified.
 Disbursal: The employer, having sent the acknowledgement,
has a time period of 30 days to pay the gratuity amount to the

9. FAQs on Gratuity
 If I resign from a company after 4.5 years of service, am I eligible for gratuity?
 No, you have to serve at least 5 years in a company to get gratuity payment. A Madras High Court ruling held that you
can avail gratuity if you have completed 240 days of service in the fifth year. It is best to check with the HR of your
company about this. However, if someone dies while in service, the gratuity amount will be paid to their legal heir even
if they have not completed 5 years of service. In addition, the amount received by a nominee/heir will not be taxed.
 I am a contract employee in a company. Will I get gratuity if I resign or retire after 5 years?
 If you are on the company rolls and are considered an employee of the company, then you will receive gratuity.
However, if you are under a contract that is separate from the company then the gratuity should come from the
contractor and not the company.
 What kind of employees does the Gratuity Act, 1972 cover?
 Payment of Gratuity Act, 1972, applies to employees of factories, mines, oilfields, plantations, ports, railway
companies, shops or other establishments related to them. All kinds of government jobs have also been included
under the purview of this act. It is applicable in all states of India except Jammu and Kashmir.
 Is there any difference in calculation of gratuity for employees who are not covered under the Gratuity Act?
 Even if you are not covered by the Gratuity Act, your employer may pay you gratuity. The calculation for this is:
Gratuity = Average salary (basic + DA) * ½ * Number of service years. In this case, the service years are not rounded
off to the next number. So if you have a service of 12 years and 10 months, you get gratuity for 12 years and not 13
years.
 Is there a cap to the amount I can receive as gratuity?
 Yes. A company cannot pay you more than Rs.10 lakh as gratuity, irrespective of the number of years you have
completed. This limit is also applicable to gratuity you can receive from different employers during your lifetime. If your
company wishes to pay you more money, they can title it under ex-gratia or bonus.
 How do I nominate someone to receive my gratuity in case of my death?
 To nominate one or more heirs for your gratuity amount, you need to fill in Form F when joining a company.
 How many days will it take for the employer to remit the gratuity amount?
 Usually, gratuity is released along with or just before/after your full and final settlement is done. The government

10. Few Significant Points About Gratuity
Following are some of the most prominent points
about payment of gratuity by an employer to an
employee.
 The employer has the right to reject payment of
gratuity to an employee if he/she has been asked to
leave his/her job owing to any misconduct.
 In case of the death of the employee, the nominee or
heir of the employee is paid the gratuity amount. The
taxation for this is calculated for the receiver under
the head – income from other sources.

11. Thanks You
By CA Rohit Gupta