What is Gratuity in Salary?
Gratuity is a part of the salary as a monetary benefit that is given to the employee by the employer at the time of retirement or leaving the company subject to completion of a minimum of 5 years from the date of confirmation of services. It is a defined benefit against which no contribution is paid by the employee.
Excluding the above, here, we are explaining its following smart features:-
What is the Payment Gratuity Act, 1972?
Payment of Gratuity Act, 1972 came into existence in September 1972, and prior to this, there was no such law in India.
The motive of this act was to provide a monetary benefit to employees on the basis of an extended term of service in a single company.
However, the Government of India has prescribed some terms and conditions for availing of Gratuity benefits.
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Gratuity Rules In India
A Company OR Organization comes under the above Act 1972 if it has 10 or more employees on any single in the last 12 months.
This Payment of Gratuity Act follows the pattern of ‘Once Covered, Always Covered. It means that once an organization or company comes under this Act, it will always be covered even while the strength of employees falls below 10.
Eligibility Criteria For Gratuity In India
As per eligibility criteria under the current existing gratuity rules, employees are eligible for gratuity only, if he/she has completed 5 years of continuous service with a single employer.
In case, if the employee expires/dies or becomes disabled during service, the below-mentioned rules will be applicable for the calculation of continuous service under the Payment of Gratuity Act 1972:-
| Terms for Continuous Service | Days Worked |
| 1 Year Service | Total 190 days in an establishment but work for less than 6 days in a week or work in a mine. |
| 6 Months Service | Minimum 95 days in an establishment/company, works less than 6 days in a week, or work in a mine. |
| Continuous Service | Total 75% of days of the year for which the establishment is open and seasonal employment exists. |
| Spl. Note: Disablement leaves, maternity leaves, and earned leaves will be counted in the service period calculation. |
Gratuity Calculation & New Rules In India 2022
Gratuity is calculated as 15 days’ wages for every completed year of continuous service with a condition of a minimum of 5 years’ length of service on the basis of the last basic salary. 7 months are counted as 1-year of service and 26 days are counted as 1 month instead of 30 OR 31 days.
For example, if an employee resigns before 7 Months i.e July, and not worked up to 31 July, then he will not be given the benefit of that year.
However, if he works up to 31 July, he will be given the benefit of that year. July Month is considered as an example, the month may be different depending on the completion of 7 months of the service.
Gratuity Amount = Total Years of Service worked in the company X Last drawn salary including DA X 15/26
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For example, suppose if any employee had joined service in any company 01.04.2010 and resigned on 16.08.2020 with the last monthly basic salary plus DA Rs. 40,000 (in 2020), your gratuity will be calculated as follows: – (15/26* Rs. 40,000)*10 = Rs.2,30,769.24
Total Service : 9 Years + 16 Months + 16 days
For your information, while there are 30/31 days in a monthly payment of the Gratuity Act, 1972, it is fixed as 26 days. Hence 26 days are used in the above formula for calculating gratuity. It is also hereby specified that the entire amount of gratuity is tax-free.
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The current limit of Gratuity amount is Rs.20,00,000/- which is tax-free but if the amount exceeds Rs.20,00,000/- it will become taxable and this amount is known as ex-gratia.
Nomination for Gratuity
After completion of One Year of confirmatory services, the employee can make a nomination by using Form F.
This nomination can be made in the name of any one of the family members. Any nomination made by an employee in the favor of another person, who does not belong to his family, shall be considered useless.
If the nominee expires earlier before the death of the employee, the interest shall revert to the employee.
In such type of cases, the employee can make a fresh nomination and shall use again Form F.
Gratuity Payment Rules after leaving the company
Gratuity payment is made by the employer within 30 days to an employee from the date of leaving the services from the company.
Generally, when an employee leaves the company, the employer will have to apply for Gratuity to LIC or can be other trusts/institutions by mentioning the date of joining, leaving, and last drawn salary(basic plus DA, if applicable).
The LIC issue the cheque of Gratuity amount to the employer and thereafter the employer issues cheque to an employee of the same amount which is received by him from the LIC.
However, if the employer fails to pay the amount on the prescribed days, he will be liable to pay simple interest, from the date on which gratuity becomes payable.
It must be noted that the gratuity amount is paid to an employee by the employer through cheque OR DD.
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Gratuity Payment Rule in case of death of an employee during service
If any employee expires during services, the following Gratuity Rules will be applicable:-
| Length of Service | Prescribed Gratuity |
| Less than 365 days/1 Year | 2 times the basic salary |
| Above 365 days but below 5 years | 6 times the basic salary |
| Above 5 years but below 11 years | 12 times the basic salary |
| Above 11 years but below 20 years | 20 times the basic salary |
| Above 20 years service | 50% of salary on completion of 6 month times of every year and maximum 33 times of the salary |
Deduction of Gratuity by Employer as per Gratuity Act
Under the above Payment of Gratuity Act, 1972, the company or organization is allowed to decline or deduct the gratuity of an employee considering the following facts: –
- Employees who leave the Job due to termination of employment on account of negligence, omission, damaging or destructing of the employer’s property, etc.
- illegal activities, Violent Character, disorderly conduct, and any other offence committed by the employee during the course of employment, etc. only
Gratuity Limit
As per Gratuity Act, 1972, the maximum limit of the Gratuity amount is Rs.20,00,000/- which is tax-free but if the amount exceeds Rs.20,00,000/-. it comes under taxable income.
This limit is applicable to the Government/Semi-Government/Private Sectors.
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Taxation Rules on Gratuity
The taxation on gratuity for employees is calculated after determining the tax gratuity amount. The tax-free amount of gratuity is the minimum among the following:
- Total Gratuity Amount Paid
- Tax-free Gratuity Ceiling Limit Rs. 20 lacs
- Total Gratuity Amount due under the Act
Please note that prior to 2018, the tax exemption limit was Rs.10.00 lacs, which was increased in 2018 by an amendment act.
However, under existing rules, gratuity payments received by government employees are not covered under the Gratuity Act, 1972.
Gratuity Application Forms
Following Gratuity application forms can be filled out to receive gratuity, as the case to be applicable:-
- Form I -Application for Gratuity Withdrawal
- Form J-To be used by the nominee for claiming Gratuity
- Form K-To be used by the legal heirs for claiming Gratuity
- Form F-To make a nomination for Gratuity
- Form G – To be used for fresh nomination
- Form H – To be used for modification in nomination for Gratuity
- Form L – To be used by the employer to the employee stating the amount and date of payment.
- Form M – To be used by the employer stating rejection of Gratuity
- Form N – Application to Labour Commissioner by an employee for Gratuity
- Form 0 – To be used by the authority to appear for a case hearing
- Form P – Summons issued by the authority to be present for the hearing
- Form R – Issued by the authority directing to make payment of the Gratuity amount
Once the above applicable gratuity application form has been filled out, it needs to be submitted to the appropriate authorities i.e. the employer in order to start the gratuity payment process.
FAQs
What is the meaning of Gratuity?
Gratuity is a monetary benefit that is given to the employee by the employer at the time of retirement or leaving the company subject to completion of a minimum of 5 years.
What is the meaning of Gratuity in Hindi ?
ग्रेच्युटी वो रकम होती है जो कर्मचारी को नियोक्ता की तरफ से दी जाती है. एक नियोक्ता के पास कर्मचारी को कम से कम पांच साल तक नौकरी करना जरूरी है, पर ये रकम तब दी जाती है, जब कोई कर्मचारी नौकरी छोड़ता है या उसे नौकरी से हटाया जाता है या फिर वो रिटायर होता है.
What is the meaning of Gratuity in Salary?
Gratuity is a payment that is given to an employee by the employer at the time of leaving the Job or retirement subject to a minimum service of 5 years from the date of confirmation. It is a hidden part of salary and included in CTC.
What is Gratuity Calculator?
Suppose final month Salary: Rs.5000.00
How long did you work: 5 Years 0 Months
Total Gratuity:5000 X 5 x 15/26
Total Gratuity amount: Rs.14423.08
What is the Gratuity Formula?
Gratuity Amount = Total Years of Service worked in the company X Last drawn salary including DA X 15/26
Gratuity Eligibility
As per Gratuity Act, 1972, an employee is eligible to get gratuity only after he or she has worked with an organization for at least five years.
Moreover, if an employee becomes disabled or expires during the service, the law allows the employer pays the gratuity to the employee or his or her nominee, regardless of the number of years of continuous service.
How does Gratuity Works?
If an employee leaves, the company after at least 5 years, he or she is eligible to claim their gratuity amount as per the Payment of Gratuity Act, 1972 on the basis of the following gratuity formula:-
Gratuity Amount = Total Years of Service worked in the company X Last drawn salary including DA X 15/26
How to calculate gratuity for private-sector employees?
The calculation formula for Private Sector as well as Government Sector is the same, which is given as below:-
Gratuity Amount = Total Years of Service worked in the company X Last drawn salary including DA X 15/26
What is 15/26 in Gratuity Calculations?
In Gratuity Calculations, 15 means, In One year 15 days benefit is given of the basic salary and 26 means, as per gratuity act, one month is considered as 26 days.