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What is Gratuity in Salary?

There are certain perks if you work with an organisation for a long time. One of them is the payment of gratuity in salary.

In this article, we will highlight precisely what this benefit is and how you can use it.

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What Is the Meaning of Gratuity?

According to the Payment of Gratuity Act 1972, an employer has to pay an employee a sum of money for services rendered to the company.

Typically, gratuity is paid to those employees who have completed 5 or more years in the company. Additionally, this Act covers all companies with more than 10 employees.

Informally, gratuity means a monetary "Thank You" to the employee for faithful services rendered.

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How Does Gratuity in Salary Work?

First of all, an employer solely pays gratuity in salary. There is no employee contribution at all.

Moreover, there are two ways in which an employer can pay this gratuity. The ways are: -

Direct payment to any employee
Contribution to a general gratuity plan with a service provider.

Typically, we calculate compensation on a specific portion of one's salary, which is later paid to an employee.

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What Is the Eligibility Criteria for Gratuity?

Usually, 4 cases make a person eligible to receive gratuity.

These are -

A person should be eligible for superannuation.
A person might have resigned after working for minimum 5 years with an employer. This is the minimum eligibility for gratuity.
Gratuity is paid when a person retires.
It is also paid when a person passes away due to an accident or illness.

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How to Calculate Gratuity in Salary?

Employers use a straightforward formula for the calculation of gratuity. This is –

Gratuity = N*B* 15/26

Where,

N	Number of years an employee has worked in a single organisation
B	Last basic salary, including the DA

Example of Calculating Gratuity in Salary

For your better understanding, we have shown an example of how to calculate the gratuity below.

Parameters	Value
N (Number of years an employee has worked in a single organisation)	10 years
B (Last basic salary, including the DA)	₹ 20,000
Gratuity = 10* 20,000 *15/26	₹ 1,15,385

If the final gratuity eligibility period is less than 6 months, then the number of years is rounded off to a lower value. If the number of months is greater than 6 years, then the number of years is rounded up to the next higher value.

How to Calculate Gratuity for Employees Not Covered Under the Gratuity Act 1972?

There are some cases whereby an employee can receive gratuity from an employer even if an organisation is not a part of the Gratuity Act. Here is how you can calculate the compensation for those cases.

Gratuity is based on a half month's salary and includes components such as -

1. Dearness allowance

2. Basic salary

3. Commission (sales-based)

Further, we have shown the formula below –

Gratuity = (15*L*P)/30

Where,

P	Period of service
L	Last basic salary

In this case, if the final service period is less than 6 months, the duration will be rounded off to the lower year and if the course is greater than 6 months, then round up one year.

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For your convenience, we have shown a table below with an example.

Example of Calculating Gratuity in Salary for Employees Not Covered in the Gratuity Act 1972

Parameters	Value
P (Period of service)	Last basic salary10 years and 9 months
L (Last basic salary)	₹ 50,000
Gratuity = (15* 50,000*11)/30	₹ 2,75,000

How to Calculate Gratuity in Salary in Case of Death of an Employee?

In the case of an employee's death, you can calculate gratuity in the following way, according to their service period -

Tenure of Service	Gratuity in Salary
< 1 year	2 * basic salary
1 < = Tenure of service < 5 years	6 * basic salary
5 < = Tenure of service < 11 years	12 * basic salary
11 < = Tenure of service < 20 years	20 * basic salary
Tenure of service < 20 years	Half of the basic salary for each six months, subject to a maximum of 33 times of the basic salary.

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What Are the Latest Advancements Concerning Gratuity in Salary?

The latest advancements concerning gratuity are -

For tax-free compensation, the Government has raised the ceiling to ₹ 20 lakhs from ₹ 10 lakhs. Central Government employees also received the same benefit after the announcement of the 7th pay commission.
Due to COVID-19, the Government proposes to offer a gratuity for employees working for one year in a fixed-term period.
Moreover, an employer can refuse to pay gratuity in the case of misconduct of an employee.

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What Is the Taxation Policy for Gratuity?

Here is the taxation policy for gratuity -

In the case of a government employee, the gratuity is exempt from income tax.
For other salaried individuals who receive gratuity from employers covered under the Gratuity Act, 15 days salary as per the last salary withdrawn is non-taxable.
For those employees who are receiving gratuity from employers NOT covered by the Gratuity Act, the following 3 cases are exempt from tax -
- ₹20,00,000
- Gratuity amount received
- Half month's salary for every year that the employee has completed with the employer.

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Are There Any Exemptions Available on Gratuity?

1. The gratuity earned by Government employees is exempt from tax.

2. For those under the Gratuity Act 1972, the gratuity exemption is the least of the following amounts:

(15/26) * last drawn salary * completed years of service or part thereof more than 6 months.
₹ 10 lakhs
₹ 20 lakhs
Actual gratuity received

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For example, Ms Aditi Saxena has worked for 15 years and 5 months, with a monthly basic pay plus dearness allowance salary of ₹ 20,000 and a total compensation of ₹ 40,000.

Under the Gratuity Act 1972, she is exempt from paying the least of these amounts.

Case 1:	*(15/26) ₹ 40,0000 * 15 years**	₹ 3,46,153.85
Case 2:	₹ 20 lakhs	₹ 20 lakhs
Case 3:	Actual gratuity received = (15/26) * 15 * ₹ 20,000	₹ 1,73,076.92

So, as can be seen, the exemption will be the least of the three, which is ₹1,73,076.92.

3. The following rules apply for tax exemption for those who are not under the Gratuity Act of 1972 -

Half month's average salary * completed years of service
₹ 10 lakhs
Actual gratuity received

Below is an example to help demonstrate the above criteria.

Case 1:	*(1/2) ₹ 20,000 * 15**	₹ 1,50,000
Case 2:	₹ 20 lakhs	₹ 20 lakhs
Case 3:	Actual gratuity received = (15/26) * 15 * ₹ 20,000	₹ 1,73,076.92

Hence, in this case, the exemption will be as per the least of the above points, which is ₹ 1,50,000.

What Are the Important Rules for Gratuity?

There are some rules to bear in mind concerning the payment of gratuity.

Forfeiture of Gratuity: As per the Gratuity Act of 1972, an employer may forfeit the payment of the entire or partial gratuity amount. This is only done in the case of disorderly conduct on the part of an employee leading to physical injury of other employees.

Timeline for Gratuity Payment: Here's how to claim your gratuity! All you have to do is write an application to the organisation asking for your compensation. Once they view and calculate it, they will inform you and the concerned authority for disbursal. Then, disbursal will be done within 30 days.

How to Withdraw Gratuity?

You can withdraw your gratuity by filling and submitting a claim form 1 to your employer at the time of resignation. Some documents that they may ask of you are Aadhaar card, cancelled cheque, and bank passbook. That was how to apply for gratuity after the resignation.

So that was all from us on the calculation of gratuity in salary and the method to claim it.

Happy retirement!

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Frequently Asked Questions

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What is the maximum gratuity amount payable?

There is a cap on the maximum gratuity payable which is 20 lakhs. However, if an employer wishes to give more, they can call it ex gratia or bonus.

Who gets the gratuity in case of death?

To nominate a person to receive your gratuity, you will need to fill in Form F on joining a company.

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