Gratuity – Definition, Eligibility, calculation, tax implications

Are you a salaried employee of any company or organization sector and have completed 5 years of continuous services? Congratulations! You are eligible to get gratuity in accordance with the payment of gratuity act, 1972. Now you are confused about what is a gratuity, who are eligible to get gratuity, how to calculate the gratuity amount, taxation of gratuity and how to get the gratuity. In this column, we will cover the above-mentioned points.

Let’s get started.

What is Gratuity?

The gratuity is the monetary benefit i.e. a lump sum payment given to the employee by his/her employer without any contributions made during the service tenure at the time of retirement, superannuation, resignation, from service.

Who are eligible to get gratuity?

Under section 10(10) of the income tax act, an employee can get gratuity if he/she has completed a minimum 5 years of continuous service with the current employer.

Usually, gratuity is payable at the time of

  • Retirement.
  • On superannuation after you become eligible for superannuation.
  • Resignation or termination after a continuous service period of 5 years.
  • On death or unable to work owing to the disability due to an accident or disease.
  • Retrenchment i.e. the closure of the company or organization.
  • VRS.

Does the payment of gratuity is mandatory for all companies?

If the company’s strength exceeds 10 persons then the employer is liable to pay gratuity in accordance with the gratuity act, 1972. In the case of employee strength is less than 10, the act does not restrict the employer to pay gratuity to its employees and the employer is not liable to give a gratuity. But once the employee strength exceeds 10 and the company comes under the Payment of Gratuity Act, 1972, the company is liable to pay gratuity even if the employee strength is reduced to less than 10. The employees always remain covered under the Payment of Gratuity Act, 1972.

What does it mean 5 years of continuous service?

In accordance with the payment of gratuity act, 1972, the service period can be treated as continuous where the break of service is not voluntary or beyond the control of any employee. The following conditions do not break the continuous service anymore,

  • Sickness.
  • Temporary disablement due to an accident.
  • Leave i.e. Maternity or paternity leave or childcare leave.
  • Layoff.
  • Strike.
  • Lockout.

So, if you are absent owing to the above-mentioned reasons the tenure of your service can be treated as continuous service and computation of gratuity amount accordingly.

How to calculate the 5 years of continuous service?

 In order to get gratuity, any individual must have 5 years interrupted services without changing the company or organization. Let’s calculate the service period across various companies.

  • If you are working in a company which operates on a ‘5 days in a week’ then 190 days will be counted as one year while calculation of service period. So, if you have completed a service period of 4 years and 190 days in any company or organization, you are eligible for the gratuity.
  • In the case of if your company operates on a ‘6 days a week’ then 240 days will be counted as one year while calculation of service period. So, if you have completed a service period of 4 years and 240 days in any company or organization, you are eligible for the gratuity.

So, from the above calculations, it is clear that if an employee works in such a company which offers ‘5 days a week’ then a service period of 4 years and 8 months can be considered as a 5 years continuous service and the individual is eligible to get gratuity.

However, if an employee works in such a company which offers ‘5 days a week’ then a service period of 4 years and 5 months can be considered as less than 5 years continuous service and the individual is not eligible to get gratuity.

If an employee is transferred abroad on any project or assignment still the employee is eligible for gratuity. This service abroad is treated as a continuous service since the employee is on the service of the employer. After Joining in any company, the probation period irrespective of 6 months or 2 years is counted as continuous service.

What happens if the employee does not complete the 5 years of continuous service due to death or disability?

If the employee is unable to complete the five years of continuous service due to death or disability owing to an accident, still the employee is eligible to get gratuity deemed to have completed five years of continuous service. But the amount of gratuity is calculated on the actual years of continuous service is not 5 years. In the case of death, the gratuity amount shall be credited to the nominee or legal heir to the employee.

How to calculate the gratuity amount?

Gratuity amount can be calculated on the basis of last drawn salary and the service period rendered in the company or organization. But the gratuity amount varies from any company or organization to others on the basis of whether the company i.e. non-government organizations are covered under the Gratuity Act, 1972.

Calculation of the Gratuity amount where the employee is covered by the payment of gratuity act, 1972

As we have discussed earlier that if the organization has more than 10 employees then the employee will be covered under the Gratuity Act, 1972. The gratuity amount is calculated on the basis of 15 days salary and the number of years of the continuous service period.

Gratuity amount formula

If your service period in any organization or company is 29 years and 7 months then your service period can be considered as 30 years.

If your service period in any organization or company is 29 years and 5 months then your service period can be considered as 29 years.

Suppose the last drawn salary of any employee = Rs. 1 Lakh.

No of years of continuous service in any company = 29 years and 7 months = 30 years.

So, by making use of the above formula the gratuity amount will be,

Calculation of the Gratuity amount where the employee is covered by the payment of gratuity act, 1972

Calculation of the Gratuity amount where the employee is not covered by the payment of gratuity act, 1972

As we have discussed earlier that no law restricts a company to give gratuity benefits to its employees even if the company’s employee strength does not exceed 10.

The companies which are not covered by the gratuity act, 1972 the gratuity amount can be calculated on the basis of 15 days of salary and number of years of continuous service.

Calculation of the Gratuity amount where the employee is not covered by the payment of gratuity act, 1972

Here the number of the continuous service period will be calculated on the basis of each completed year. Let’s make it clear with the following example.

Irrespective of your service period in any organization or company 30 years and 7 months or 30 years and 3 months in both the cases your service period can be considered as 30 years.

So, by making use of the above formula the gratuity amount will be,

Gratuity amount Calculation not covered by the payment of gratuity act, 1972

Tax implications on gratuity

In the case of Central Government employees, State Government employees, Defence Personnel, any gratuity received on retirement or death or superannuation or VRS is completely tax-free.

The employees who are covered by the Payments of Gratuity Act, 1972.

An employee can get the rebate on the gratuity of maximum Rs. 30 lakhs. More than this is taxable. The least of the following is exempted from tax:

  • Last salary (basic + DA) × number of years of employment × 15/26
  • Rs. 30 lakhs
  • Gratuity actually received.

Tax implications on Gratuity

The employees who are not covered by the Payments of Gratuity Act, 1972.

An employee can get the rebate on the gratuity of maximum Rs. 30 lakhs. More than this is taxable. The least of the following is exempted from tax:

  • Last salary (basic + DA) × number of years of employment × 15/30
  • Rs. 30 lakhs
  • Gratuity actually received.

Forfeiture of gratuity

Under section 4(6) enables an employer to forfeit gratuity payable to any employee during the course of employment owing to the following circumstances.

If the employee whose services has been terminated for willful omission or negligence which has caused any damage or loss of the property which belongs to the employer then the employer shall forfeit the damage or loss incurred to some extent.

If the employee whose services has been terminated for riotous or disorderly conduct or any act of violence or committed offense which involves moral turpitude.

List of forms

Here is the list of various forms which you need to know for various purposes,

Form F – Nomination Form to add nominee if you are unmarried.

Form G – Fresh nomination in case of marriage.

Form H – Modification of the existing nominee.

Form I – Application for the payment of the gratuity in the circumstances of retirement or termination or resignation or disability.

Form J – Application for the payment of the gratuity in the case of demise of the employee by the nominee.

Form K – Application for the payment of the gratuity by legal heirs.

Form L – This form issued by the employer to the employee stating gratuity amount and date of payment of gratuity.

Form M – This form issued by the employer to the employee stating the reasons for rejecting the payment of gratuity.

Where should register a complaint

In the case of the sudden death of any employee or inability to work due to disability caused by an accident or disease then the employer is liable to pay gratuity to the employee or nominee/legal heir of the employee irrespective of the number of years of continuous service. If the employer rejects the application then the employer should be required to specify the reasons for rejection.

But if the employee does not credit the gratuity amount to the employee/nominee/legal heir within 30 days from the date of receipt of the application then the employee can contact the Controlling Authority. By making use of Form O the controlling authority may request to appear both the employer and the employee/nominee/legal heir on a specified date time and place. After hearing both the sides if the controlling authority gets satisfied with the employee/nominee/legal heir then the employer is liable to pay the Gratuity amount along with the interest for the delayed period.

Hope this article will help you to calculate the gratuity amount in India and the tax implications of gratuity amount. If you have got any question feel free to comment so that we can have a discussion. If you have found this post helpful feel free to share with your loved ones.

Leave a comment

3 Shares
Copy link
Powered by Social Snap