{"id":1339,"date":"2021-06-24T13:33:58","date_gmt":"2021-06-24T08:03:58","guid":{"rendered":"https:\/\/www.olxpeople.com\/blog\/?p=1339"},"modified":"2024-01-31T21:19:43","modified_gmt":"2024-01-31T15:49:43","slug":"gratuity","status":"publish","type":"post","link":"https:\/\/go-better.com\/blog\/gratuity\/","title":{"rendered":"Gratuity: Check Eligibility, Gratuity Formula, Calculation"},"content":{"rendered":"<p><span style=\"font-size: 14pt;\"><strong>Table of Contents<\/strong><\/span><\/p>\n<ul>\n<li><a href=\"#What is the Payment of Gratuity Act 1972?\">Payment of Gratuity Act 1972?<\/a><\/li>\n<li><a href=\"#Eligibility criteria for payment of gratuity\">Eligibility criteria for payment of gratuity<\/a><\/li>\n<li><a href=\"#Gratuity formula\">Gratuity formula<\/a><\/li>\n<li><a href=\"#Gratuity calculation\">Gratuity calculation<\/a><\/li>\n<li><a href=\"#Payment of Gratuity in case of Death of an Employee\">Gratuity in case of Death<\/a><\/li>\n<li><a href=\"#Different types of forms of gratuity\">Gratuity Forms<\/a><\/li>\n<li><a href=\"#Income tax rules on gratuity as per the Income Tax Act\">Income tax rules on gratuity<\/a><\/li>\n<li><a href=\"#FAQs - Gratuity\">FAQs &#8211; Gratuity<\/a><\/li>\n<\/ul>\n<p>Before we get into its eligibility, formula and calculation, let us first understand what gratuity is. This information will help you acknowledge its significance and understand the amount of gratuity payout you will be eligible for, along with the gratuity limit, the tax on gratuity and exemptions.<\/p>\n<p>Gratuity refers to a one-time monetary <a href=\"https:\/\/www.betterplace.co.in\/benefit\/\">benefit<\/a> that the employer pays to their employee, after a certain period, for the services offered by the employee.<\/p>\n<p>As the name suggests, gratuity is an employer\u2019s way of expressing gratitude towards their employees for their long-standing service to the organisation. This act of generosity is made compulsory by law and is covered under the Payment of Gratuity Act, 1972. This act is also commonly known as the Gratuity Act. According to the act, to become eligible for the gratuity payout, the employee has to complete at least five consecutive years of service with the same employer.<\/p>\n<p>Usually, gratuity is paid at the time of retirement, but you can also claim it if you change your job after five years. However, the five-year condition for gratuity payout is not applicable if the employee becomes disabled (due to accident or illness) or dies while still in service.<\/p>\n<h2 id=\"What is the Payment of Gratuity Act 1972?\">What is the payment of Gratuity Act 1972?<\/h2>\n<p>The Payment of Gratuity Act 1972 was implemented in September 1972 with the fundamental idea of providing monetary benefits to employees who have offered extended years of service to one employer. This act applies to all organisations and industries across India.<\/p>\n<p><strong>The gratuity rules apply to both type of employees, viz,<\/strong><\/p>\n<ul>\n<li>Employees covered under the gratuity act, and<\/li>\n<li>Employees not covered under the gratuity act.<\/li>\n<\/ul>\n<p>According to the existing gratuity eligibility rules, companies\/establishments that employ ten or more people are automatically covered under the Payment of Gratuity Act, 1972. State and central government employees, however, are covered under their own set of service gratuity rules which don\u2019t come under the Payment of Gratuity Act, 1972.<\/p>\n<h2 id=\"Eligibility criteria for payment of gratuity\">Eligibility criteria for payment of gratuity<\/h2>\n<p>To receive the gratuity payout, one needs to meet the following gratuity eligibility rules:<\/p>\n<ul>\n<li>The employee must be qualified for retirement or superannuation benefits.<\/li>\n<li>The employee must be retired from service.<\/li>\n<li>The employee should have resigned from the company after being employed for a continuous period of five years.<\/li>\n<li>The employer has suffered disability from an accident or illness, or, in the case of death.<\/li>\n<\/ul>\n<h2 id=\"Gratuity formula\">Gratuity formula<\/h2>\n<p>The formula to calculate gratuity, as mentioned in the Payment of Gratuity Act, 1972, comprises mainly of your 15 days salary for each completed year of continuous service with the same organisation and is based on the last salary received. The latter figure is the last basic salary drawn + dearness allowance. HRA is not included in the calculation. Thus, the gratuity formula works out to be as follows:<\/p>\n<p style=\"padding-left: 40px;\">Gratuity = t*s*15\/26<br \/>\nwhere\u2026<br \/>\nt = time of continuous service with the same company in years<br \/>\ns = sum of last basic salary received and dearness allowance<\/p>\n<h2 id=\"Gratuity calculation\">Gratuity calculation<\/h2>\n<p>For instance, if a person has been employed in the company for 17 years, and, the total of last basic salary drawn and dearness allowance amounts to 40,000\/- in INR, then, as per the formula, gratuity is as follows:<\/p>\n<p style=\"padding-left: 40px;\">Gratuity amount = 17*40000*(15\/26)<br \/>\n= 3,92,308\/- in INR<\/p>\n<p>Two important conditions that you should note are:<\/p>\n<ol>\n<li>According to the gratuity rule, the amount of gratuity payout should not exceed ten lakhs in INR. However, if the employer wishes, they can pay more than ten lakhs as a gratuity to the employee. The amount beyond the gratuity limit of ten lakhs will be termed as a non-obligatory contribution or ex-gratia.<\/li>\n<li>The total number of months worked in the last year of employment will also be considered in the calculation. If in the final year, you have worked for more than six months, then the employer rounds the service to a whole year. And, if it is less than six months, then that year is not considered in the calculation. For instance, if your service period is 17 years and seven months, then 18 years will be considered for gratuity calculation. Whereas, if the service period is 17 years and three months, then 17 years will be considered for gratuity calculation.<\/li>\n<\/ol>\n<h3><strong>How is gratuity calculated for the employees who are not covered under the Gratuity Act?<\/strong><\/h3>\n<p>Employers are not restricted by law in the means of gratuity even if the organization is not composed under the Gratuity Act. The gratuity amount is calculated based on half a month\u2019s salary for completed service years. The salary component for the calculation is the sum of basic pay, sales commission and DA.<\/p>\n<p>The formula for the calculating gratuity amount for employees who are not covered under the Gratuity Act is:<\/p>\n<p><i>Gratuity Amount = (15 * Last drawn salary amount * period of service) \/ 30<\/i><\/p>\n<p><strong>Example:<\/strong><\/p>\n<p>If Mr.Abc is an employee of the company XYZ. XYZ is not covered under the Gratuity Act.<\/p>\n<p>Mr. Abc&#8217;s last drawn salary = 50,000<\/p>\n<p>His service years = 10.9 years<\/p>\n<p>Gratuity amount will be: (15*50,000*11)\/30 = 275,000\/-<\/p>\n<p><i><strong>Note:<\/strong> Here instead of 10 years, 11 years are considered since the excess month count exceeds 6.\u00a0<\/i><\/p>\n<h2 id=\"Payment of Gratuity in case of Death of an Employee\"><strong>Payment of Gratuity in case of death of an employee<\/strong><\/h2>\n<p>The gratuity benefits for a deceased employee are calculated based on his\/her tenure of service. The amount is subject to a maximum of 20 lakh rupees. Here are the rates at which gratuity will be paid in such cases.<\/p>\n<div style=\"overflow-x: auto;\">\n<table>\n<tbody>\n<tr>\n<td><b>Tenure<\/b><\/td>\n<td><b>Amount payable<\/b><\/td>\n<\/tr>\n<tr>\n<td>&lt;1 year<\/td>\n<td>2 x Basic salary<\/td>\n<\/tr>\n<tr>\n<td>1 &#8211; 5 years<\/td>\n<td>6 x Basic salary<\/td>\n<\/tr>\n<tr>\n<td>5 &#8211; 11 years<\/td>\n<td>12 x Basic salary<\/td>\n<\/tr>\n<tr>\n<td>11 &#8211; 20 years<\/td>\n<td>20 x Basic salary<\/td>\n<\/tr>\n<tr>\n<td>20+ years<\/td>\n<td>Half of the basic salary for each completed 6 months<\/p>\n<p>Subject to a maximum of 33 x Basic salary<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<h3><strong>Forfeiture of Gratuity in accordance with the Gratuity Act<\/strong><\/h3>\n<p>According to the Payment of Gratuity Act 1972, the employer can forfeit the employee&#8217;s gratuity in the following cases.<\/p>\n<ul>\n<li>Employee is terminated by wilful omission or negligence causing damage or loss of employer&#8217;s property.<\/li>\n<li>Employee got terminated due to an offence involving moral vileness.<\/li>\n<\/ul>\n<p>The company can decide whether the gratuity should be partially or completely forfeited based on the offence the employee committed.<\/p>\n<h2 id=\"Different types of forms of gratuity\"><strong>Different types of forms of Gratuity<\/strong><\/h2>\n<div style=\"overflow-x: auto;\">\n<table>\n<tbody>\n<tr>\n<td><b>Form Name<\/b><\/td>\n<td><b>Purpose<\/b><\/td>\n<\/tr>\n<tr>\n<td>I<\/td>\n<td>Gratuity payment application<\/td>\n<\/tr>\n<tr>\n<td>J<\/td>\n<td>Gratuity payment application for the nominee<\/td>\n<\/tr>\n<tr>\n<td>K<\/td>\n<td>Gratuity payment application for legal heir<\/td>\n<\/tr>\n<tr>\n<td>F<\/td>\n<td>Make nomination<\/td>\n<\/tr>\n<tr>\n<td>G<\/td>\n<td>Make new\/fresh nomination<\/td>\n<\/tr>\n<tr>\n<td>H<\/td>\n<td>Modify nomination<\/td>\n<\/tr>\n<tr>\n<td>L<\/td>\n<td>Issued by the employer to employee stating date and amount of payment<\/td>\n<\/tr>\n<tr>\n<td>M<\/td>\n<td>Issued by the employer to employee stating the reason for rejection<\/td>\n<\/tr>\n<tr>\n<td>N<\/td>\n<td>Application made to the labour commission by an employee<\/td>\n<\/tr>\n<tr>\n<td>O<\/td>\n<td>Issued by the authority to appear for case hearing<\/td>\n<\/tr>\n<tr>\n<td>P<\/td>\n<td>Summons issued by authority to be present for hearing<\/td>\n<\/tr>\n<tr>\n<td>R<\/td>\n<td>Issued by the authority directing to make gratuity payment<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<h2><strong>Tax deductions on Gratuity<\/strong><\/h2>\n<ul>\n<li>Any gratuity received by the public sector employees apart from statutory corporations is completely free of tax.<\/li>\n<li>The least of the following is exempted from tax according to the article 10 of the income tax act.\n<ul>\n<li>Last salary (basic + DA)* no: of years of service* 15\/26;<\/li>\n<li>Rs. 20 lakhs (which has been lifted from Rs. 10 Lakh as per the new amendment);<\/li>\n<li>Gratuity amount received<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><strong>Basic timeline for the Gratuity payment<\/strong><\/h3>\n<p><strong>Initiation:<\/strong> The phase where the individual applies for gratuity by sending relevant form or application to the employer.<\/p>\n<p><strong>Reception and Calculation:<\/strong> As soon as the employer gets a gratuity disbursal request, they should acknowledge and provide a notice to the employee stating the specified amount.<\/p>\n<p><strong>Disbursal:<\/strong> Employers should complete the disbursal of the complete amount within 30 days of releasing the notice.<\/p>\n<h2 id=\"Income tax rules on gratuity as per the Income Tax Act\">Income tax rules on gratuity as per the Income Tax Act<\/h2>\n<p>The tax on gratuity and tax exemption on the gratuity payout depends on the nature of employment of the employee. The three major gratuity categories include:<\/p>\n<ul style=\"list-style-type: square;\">\n<li><strong>The eligible government employee:<\/strong><br \/>\nThe gratuity payout for government employees (state\/central\/local authority) falls under the tax exemption category of the Income Tax Act.<\/li>\n<li><strong>The eligible employee of an employer covered as per the Gratuity Act:<\/strong><br \/>\nOnly 15 days salary out of the last received salary is eligible for tax exemption under the income tax rules.<\/li>\n<\/ul>\n<ul>\n<li><strong>The eligible employee for an employer not covered as per the Gratuity Act:<\/strong><br \/>\nThe minimum amount out of the three scenarios, as mentioned below, will be considered for tax exemption as per the income tax rules:<\/li>\n<\/ul>\n<p style=\"padding-left: 40px;\">\u21d210 lakhs in INR<br \/>\n\u21d2The actual gratuity amount<br \/>\n\u21d2Half a month&#8217;s salary for every full year of employment with the same employer<\/p>\n<h3><strong>Nomination under The Payment of Gratuity Act 1972<\/strong><\/h3>\n<p>All the employees completing one year of service are asked to make a nomination for the gratuity. The nominee can be one or more than one, and maybe changed anytime by the employee. If the employee fails to provide a nominee, the amount shall be paid to the closest legal heir of the deceased employee. If the heir turns out to be minor, the bank holds the amount until the child reaches maturity. The family or heir defined under the act can be Spouse, Children, Adopted child or Dependent parents.<\/p>\n<p>With the help of this gratuity formula and calculation, employers can calculate the amount of gratuity that they have to pay to their eligible employees. Alternatively, you may hire a recruitment and staffing agency that will take care of all your compliance needs.<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"FAQPage\",\n  \"mainEntity\": [{\n    \"@type\": \"Question\",\n    \"name\": \"Does the Gratuity Act cover all states of India?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The Gratuity Act 1972 covers all the states of India except Jammu & Kashmir.\"\n    }\n  },{\n    \"@type\": \"Question\",\n    \"name\": \"Is there any cap on Gratuity?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"According to the Payment of Gratuity (Amendment) Act, 2018, the cap on Gratuity was raised from 10 lakhs to 20 lakhs.\"\n    }\n  },{\n    \"@type\": \"Question\",\n    \"name\": \"What is the penalty of delay in Gratuity payment?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The employer should pay simple interest for the gratuity amount for the period of delay.\"\n    }\n  },{\n    \"@type\": \"Question\",\n    \"name\": \"How to nominate someone for claiming my gratuity incase of my death?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Nominations can be made by filling Form F while joining or amid the career.\"\n    }\n  },{\n    \"@type\": \"Question\",\n    \"name\": \"When is Gratuity should be paid?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Superannuation or Retirement.\nResignation or Termination.\nDeath or Disablement due to accident or disease.\nRetrenchment or Layoff\nVRS (Voluntary Retirement Scheme).\"\n    }\n  },{\n    \"@type\": \"Question\",\n    \"name\": \"Is 5 years service applicable for all the mentioned cases?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"In the case of death of the employee, 5-year service is not mandatory and the amount will be given to the nominees or legal heir.\"\n    }\n  }]\n}\n<\/script><\/p>\n<h2 id=\"FAQs - Gratuity\"><strong>FAQs &#8211; Gratuity<\/strong><\/h2>\n<ol>\n<li><strong>Does the Gratuity Act cover all states of India? <\/strong>The Gratuity Act 1972 covers all the states of India except Jammu &amp; Kashmir.<\/li>\n<li><strong>Is there any cap on Gratuity? <\/strong>According to the Payment of Gratuity (Amendment) Act, 2018, the cap on Gratuity was raised from 10 lakhs to 20 lakhs.<\/li>\n<li><strong>What is the penalty of delay in Gratuity payment? <\/strong>The employer should pay simple interest for the gratuity amount for the period of delay.<\/li>\n<li><strong>How to nominate someone for claiming my gratuity incase of my death? <\/strong>Nominations can be made by filling Form F while joining or amid the career.<\/li>\n<li><strong>When is Gratuity should be paid?<\/strong>\n<ul>\n<li>Superannuation or Retirement<\/li>\n<li>Resignation or Termination<\/li>\n<li>Death or Disablement due to accident or disease<\/li>\n<li>Retrenchment or Layoff<\/li>\n<li>VRS (Voluntary Retirement Scheme)<\/li>\n<\/ul>\n<\/li>\n<li><strong>Is 5 years service applicable for all the mentioned cases? <\/strong>In the case of death of the employee, 5-year service is not mandatory and the amount will be given to the nominees or legal heir.<\/li>\n<\/ol>\n<h3><span style=\"text-decoration: underline;\">Latest news on Gratuity<\/span><\/h3>\n<p><strong>Parliament Panel Suggests To Reduce The Gratuity Payment Period To 1 Year<\/strong><\/p>\n<p><strong>August 03, 2020:<\/strong>\u00a0 The Gratuity time limit should be reduced from the current five years of continuous service to just one year, suggests Code on Social Security, 2019, reported by the Parliamentary Standing Committee on Labour.<\/p>\n<p>The committee submitted the report to the Lok Sabha Speaker on July 31, 2020. The report also suggested that the gratuity benefits should be extended to all kinds of employees, including contract labourers, fixed-term workers, daily\/monthly wage workers and many others.<\/p>\n<p><em>\u201dThe committee desires that the time limit of five years as provided for in the code for payment of gratuity be reduced to continuous service of one year.\u201d<\/em> says the report.<\/p>\n<p>The current status of the law is pending before the Parliament and if it comes to existence, it will replace nine existing social security laws. The Parliament Committee led by senior BJD MP Bhartruhari Mahtab.<\/p>\n<hr \/>\n<p><strong>Special Deposit Scheme for Non-Government Provident, Gratuity Funds &#8211; New Interest Rates<\/strong><\/p>\n<p><strong>July 28, 2020: <\/strong>The new interest rate on deposits for July-September quarter for the Special Deposit Scheme for Non-Government Provident, Superannuation and Gratuity Funds will be 7.1%, said the Finance Ministry in an official notification. The ministry has announced that the new interest rates will be valid from 1st of July, 2020.<\/p>\n<p><em>\u201cIt is hereby notified that the deposits made under the Special Deposit Scheme for Non &#8211; Government Provident, Superannuation and Gratuity Funds, announced in the Ministry of Finance (Department of Economic Affairs) Notification No.F.16(1)-PD\/75 dated 30th June, 1975, shall with effect from 1st July, 2020 to 30th September, 2020 bear interest at 7.1% (seven point one percent). This rate will be in force w.e.f. 1st July, 2020,\u201d<\/em> states the official notification.<\/p>\n<p>The authorities are reducing the interest rate on the Special Deposit Scheme considering the current high cost of borrowing and recent escalation in the repayment burden.<\/p>\n<hr \/>\n<p><strong>Related Topics:<\/strong><\/p>\n<ol>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/epf-employees-provident-fund\/\">Employees&#8217; Provident Fund<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/employee-pension-scheme\/\">Employees Pension Scheme<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/pf-withdrawal\/\">How to withdraw PF amount?<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/opt-out-option-in-pf\/\">Opt-out option in PF<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/income-tax-e-filling\/\">E-filing Income Tax in India<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/all-about-professional-tax-payments\/\">All About Professional Tax payments<\/a><\/li>\n<li><a href=\"https:\/\/www.betterplace.co.in\/blog\/e-passbook-pf\/\">Download EPF Passbook<\/a><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"<p>Table of Contents Payment of Gratuity Act 1972? Eligibility criteria for payment of gratuity Gratuity formula Gratuity calculation Gratuity in case of Death Gratuity Forms Income tax rules on gratuity FAQs &#8211; Gratuity Before we get into its eligibility, formula and calculation, let us first understand what gratuity is. This information will help you acknowledge [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":6638,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[100,98,99],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Gratuity: Check Eligibility, Gratuity Formula, Calculation - GoBetter Blog<\/title>\n<meta name=\"description\" content=\"Gratuity refers to a one-time monetary benefit that the employer pays to their employee, after a certain period, for the services offered by the employee. 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