Gratuity 2020

Last Updated 27th May 2020

Gratuity Act

Gratuity Act For Government and Non-Government Employees
Minimum Years of Service 5 years
Minimum No. of Employees 10
Gratuity Payable After Retirement/ Resignation/ Death
Tax Exemption on Gratuity Rs. 20 Lakhs
Last Drawn Salary Means Basic Salary, Dearness Allowance and Commission received on Sales

What is Gratuity?

Gratuity is given by an employer to his employee for the services rendered by him during the period of employment. A person is eligible to receive gratuity only if he has completed five years of service with an organization. These five years must be continuous and there should not be any gap in the services of the employee with that company. Gratuity is usually paid at the time of retirement, but can be paid earlier as well, in case of unforeseen conditions such as death of the individual. There is no set percentage of gratuity an employee can receive.

About Gratuity Act

The Payment of Gratuity Act came into force in the year 1972. The act covers employees working in mines, companies, ports, plantations and other such establishments that have more than ten people employees. Unlike the provident fund, the gratuity amount is totally paid by the employer without any contribution from the employee. To calculate how much gratuity is payable, the Act has divided non-government employees into two categories – Employees who come under this Act and employees who are not covered under the Act.

Gratuity Rules

Forfeiture of gratuity: An employer has the right to forfeit gratuity payment, either wholly or partially even if the employee has completed five years or more in the organisation. But this situation can only work if the employee has been terminated due to disorderly conduct like physically harming others during his/her tenure in the company.

Timeline for gratuity payment: The three important points involved in gratuity payment have been listed below:

  • Initiation: An individual must send an application to the employer regarding the gratuity they are owed by a company.
  • Acknowledgment and calculation: Once the application has been received by the employer, the company will calculate amount and send reply to the individual and the controlling authority with the amount specified.
  • Disbursal: The employer has a time period of 30 days to pay the gratuity amount after sending the acknowledgment.

Who is eligible for Gratuity?

An individual is eligible for gratuity if he/she fulfills the following criteria:

  • The employee should be eligible for superannuation.
  • He/she should have retired from the job.
  • The individual must have resigned from the job after continuous employment with the organization for five years.
  • Gratuity is earned in case of the death of that person or if he/she becomes disabled due to sickness or accident.

Formula for Gratuity Calculation

To calculate how much gratuity is payable, the Payment of Gratuity Act has divided non-government employees into two categories:

a) Employees covered under the Act: For this category, a formula is used to calculate the gratuity payable to the employees. The formula is based on the 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.

The formula is: (15 X last drawn salary X tenure of working) divided by 26 The last salary drawn includes the basic salary, dearness allowance and commission received on sales.

Example: For instance, the last drawn basic salary of Mr. Ajay is Rs. 40, 000/ month and his employment with DCB Company was for 26 years. In this case, the gratuity will be:
Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 26
 Gratuity Amount of Mr. Ajay = (15*40000*26)/26 = Rs. 6,00,000

b) Employees not covered under the Act: For this category of employees, the following formula is used:
Gratuity Amount = (15 * Salary Last Drawn * Employment Period)/ 30

The gratuity amount can be calculated based on half month's salary for each completed year. Salary includes basic, dearness allowance, and commission based on sales. The 15/30 calculation represents 15 days out of working days of a month which are 30. 

Example: For instance, Mr. Ajay is working with a firm that does not come under Payment of Gratuity Act. However, the basic salary that he last drew was Rs. 30,000/ month and he has served that organization for 25 years.
Gratuity Amount = (15 * 30000 *25)/ 30 = 3,75,000

Gratuity Online Calculator

You can use the online gratuity calculator to estimate the amount of money you will receive if you’re looking forward to your retirement or planning to leave a job after a minimum of five years of employment.

FAQs

Does the gratuity amount have any upper limit?

For government employee, the upper limit of gratuity amount is Rs. 20 Lakh. However, for non-government employees, the limit of gratuity is Rs. 10 Lakh only as of now.

How to calculate gratuity for private sector employees?

You can calculate the gratuity amount for private sector employees using the formula: (15 X last drawn salary X tenure of working) divided by 26.

How much gratuity is tax exempt?

Tax exemption gratuity amount from one or more employers cannot exceed Rs. 20 Lakhs.

How much time does an employer take to release the gratuity amount?

As per the government norms, an employer has to release the gratuity amount within 30 days from the full and final settlement date of an employee. In case of any delay, the employer is required to pay interest on the amount of gratuity from the date that is due until the actual payment date.

Is it possible for contractual or temporary employees to get the Gratuity benefits?

If the organization considers contractual or temporary employees as its employees, then they are eligible to get the amount of gratuity.

If a person has resigned from his/her job after servicing the company for 4.5 years, will he/she receive the gratuity?

No, the person will not receive the benefit of gratuity as he/she has not completed five years of service in the company. However, if the employee dies during his/her tenure with the organization, then his/her legal nominee or heir is eligible to get the gratuity amount, even if he/she has not completed five years of service.

Is notice period considered for gratuity?

Gratuity is calculated from the day you have joined an organization till the last working day including your notice period as you get salary for that time as well.

Can I get gratuity if I resign?

As per Gratuity Act, gratuity is payable only after completion of 5 years of your service. If you resign before 5 years of service, then you are not eligible to get gratuity.

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