How to Calculate Gratuity in India? And what is the Tax Exemption on Gratuity given to Employees?

Gratuity is a retirement benefit offered by an employer to an employee in recognition of his/her service rendered to an organization usually more than 5 years. Gratuity is a financial component forming part of the salary and is regulated under the Payment of Gratuity Act, 1972. In this article, we will see how to calculate gratuity in India and what are tax exemptions given on it.

Applicability of Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 applies to every organization including factories and mines, shops and establishments, railways, or educational institutions where more than 10 or more employees on any day in the preceding 12 months

Criteria for the entitlement of Gratuity Eligibility

Any employee who meets the following criteria is entitled to receive the gratuity eligibility after retirement:

1. Who is eligible for superannuation. (means an employee who attains the age of retirement is said to be in superannuation)
2. Who has resigned after continuous employment for a period of a minimum of five year
3. In case of death the gratuity, accident, or disablement, gratuity eligibility is paid to the nominee of the employee.

How is Gratuity paid by the employer?

The employer pays their employees the gratuity amount in the following two ways:

• The employer can pay the gratuity amount directly from their account
• By buying the general gratuity insurance plan- The company pays a small number of contributions to the service provider, and in return, the insurance company can pay the gratuity amount to the employee after retirement.

Note: An employee is said to be done continuous service for 5 years if he has been into uninterrupted service, including services that may be interrupted because of sickness, accident, leave, absence from duty without leave.

When is Gratuity Paid to the Employee?

1. On the superannuation of the employee
2. On Retirement or resignation  after completed years of minimum 5 years of service
3. Gratuity is paid to the nominee of the employee in the following case:

• • Death
  • Accident
  • Physical or mental disablement

The formula for “How to Calculate Gratuity in India?”

Below are the 2 ways that explain “How to Calculate Gratuity in India?”:

• For those employees whose employers are covered under the Payment of Gratuity Act,1972

Amount of Gratuity received = (15 * last drawn salary drawn * completed number of years served) / 26.

• For those employees whose employers are not covered under the Payment of Gratuity Act,1972

Amount of Gratuity received = (15 * last drawn salary drawn * completed number of years served) / 30.

Tax Exemptions on Gratuity

The tax exemptions on Gratuity given to the employees depends on the nature of employment who is entitled to receive the gratuity.

• The amount of gratuity received by any government employee (whether central/state/local authority) is completely exempt from tax.
• Gratuity received by the private employee is available for those employees whose employer is covered under the Payment of Gratuity Act.

If covered under the Payment of Gratuity Act, 1972

The least of the following three amounts will be exempted under Section 10 (10) of the income tax Act, 1961

1. Rs 20 lakh.
2. The amount of gratuity drawn
3. 15 days’ Salary last drawn for each year of service or part thereof

If not covered under the Payment of Gratuity Act, 1972

The least of the following three amounts will be exempt under Section 10 (10) of the  income tax, 1961:

1. Rs 20 lakh.
2. The amount of gratuity received
3. Half a month’s Salary has been drawn for each completed year of service based on the last 10 months’ average salary immediately before the month of retirement.

Forfeiture of Gratuity

According to the Payment of Gratuity Act of 1972, an employer can deny the employees of their gratuity payment if;

1. If the employee has been terminated due to his disorderly conduct.
2. Or, where the employees have tried to physically harm any individuals in the organization during their period of employment.

Period of the release of payment of Gratuity

The government has mandated the employers to pay the amount of gratuity within 30 days immediately after the date of retirement or from the application for the request of an application. If there is any delay in complying with this deadline, the employer has to pay simple interest on the amount from the date when the payment has to be made.

Penalties

1. If an employee avoids any payment to be made by himself or knowingly any false statement or false representation for the same, shall be punishable with imprisonment for a term up to six months, or with a fine which may extend to Rs. 10000 or with both.
2. An employer who contravenes with any of the provisions of any rule or any order made under this Act shall be punishable with imprisonment for a term which could exceed beyond 3 months but not more than 1 year, or with a fine that is more than 10000 rupees but not exceed more than 20000 rupees, or with both.
3. If the employer has refused to pay the gratuity amount, he shall be punishable with imprisonment for a term which shall not be less than 36 months but which may extend to 2 years, unless the court has expressly lessened the amount of punishment.

Frequently Asked Questions (FAQs)

1. I have been working as a contract employee with a company for more than 5 years. Will I be able to get a gratuity from the employer?

Generally, only full-time employees are eligible to get gratuity. However, if one is working as a contractor, then the gratuity payment must come from your contractor, and not from the company. 

2. I have been working for a Private Limited Company for the last 15 years. Am I eligible to claim a Gratuity from the company?

Every organization that has employed more than 10 or more employees on any day in the preceding 12 months is entitled to pay gratuity to their employees.

3. I worked for a private limited company for 9 years and 6 months. The employer is delaying paying me the gratuity. What should I do?

The government has mandated the employers to pay the amount of gratuity within 30 days immediately after the date of retirement or from the application for the request of an application. If there is any delay in complying with this deadline, the employer has to pay simple interest on the amount from the date when the payment has to be made. You can file a complaint before the labor commissioner of your jurisdiction for claiming the gratuity amount.

4. Does the Gratuity amount have a cap?

The maximum amount of Gratuity that an employee can receive from the employer is Rs.10 Lakhs despite the number of years he/she has spent with the company. However, If the organization wants to pay more than this amount, then they can give it as a bonus, reward, or any other form of compensation.

5. How to calculate gratuity in India?

Gratuity = Average salary (basic + Dearness Allowances) * ½ * Number of service years