Gratuity - Eligibility, Rules, Taxation, Calculation & More

Gratuity refers to an amount of money which an employer pays to his employee in return for services offered by him to the company. However, only those employees who have been employed in the company for five years or more than five years are given gratuity. You may perceive gratuity like gratitude expressed by the company towards their employees for their services. It is governed by the Payment of Gratuity Act 1972.

In this article we shall also learn about:

  1. What is Gratuity ?
  2. Eligibility for Gratuity
  3. How do we calculate Gratuity ?
  4. What are the Tax Implications on Gratuity ?
  5. When can Gratuity be forfeited ?
  6. What are the forms applicable for Gratuity ?
  7. Frequently Asked Questions

What is ​Gratuity?

Gratuity is given by the employer to his/her employee for the services rendered by him during the period of employment. It is usually paid at the time of retirement but can be paid earlier, provided certain conditions are met.

A person is eligible to receive gratuity only if he has completed minimum 5 years of service with an organisation. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to accident or disease.

There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to receive- an employer can use a formula-based approach or even pay higher than that. Gratuity payable depends on two factors: last drawn salary and years of service. To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:

a) Employees covered under the Act
b) Employees not covered under the Act

An employee will be covered under the Act if the organisation employees at least 10 persons on a single day in a preceding 12 months. And once an organisation comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees is falls below 10.

What is the ​eligibility criteria for payment of Gratuity?

In order to receive gratuity, you need to fit the following eligibility criteria:

1. You should be eligible for superannuation

2. You should have retired from the job

3. You should have resigned after remaining employed for 5 years with the company

4. In case of your death, or if you become disabled on account of sickness or accident

What is the ​formula for calculating amount of Gratuity?

The amount of gratuity can be calculated using the following formula

Gratuity = n*b*15/26

Where n = tenure of service completed in the company

b = last drawn basic salary + dearness allowance

Imagine that you worked with XYZ company for a period of 15 years. Your last drawn basic salary along with dearness allowance was Rs 30000. Hence,

The amount of gratuity = 15*30000*15/26 = Rs 2,59,615

Two points need to be noted here:

As per the Gratuity Act, the amount of gratuity cannot be more than Rs 10 lakh. Any excesses would be treated as ex-gratia

If the last few months in the last year of employment are more than 6 months, then it will be rounded to next number. Suppose your tenure of service is 16 years 7 months, then you receive gratuity for 17 years. Otherwise for 16 years if it happens to be 16 years 4 months

What are the ​Taxation rules for Gratuity?

The tax treatment of gratuity depends on the nature of the employee who is in receipt of gratuity. There are 3 major categories in this

The government employee who is eligible for gratuity The amount of gratuity received by any government employee (whether central/state/local authority) will be exempt from income tax. Any other eligible employee whose employer is covered under Payment of Gratuity Act In this case, last drawn salary of only fifteen days will be exempt from income tax.

Any other eligible employee whose employer is not covered under Payment of Gratuity Act Here, the least of the following 3 amounts will be exempt from income tax:

a.Rs 10 lakh

b.The actual amount of gratuity received

c.Half month’s salary for every year of employment that the employee has completed with the employer

What are the ​Rules monitoring Gratuity ?

Every employer is bound to give a gratuity amount to its employees if it employs more than 10 people. But you would get the gratuity only after completing at least 5 years in the service.  There are other rules of gratuity. Let us understand them one by one.

15 Years of Continuous Service

You will get the gratuity only after the completion of 5 years in the service. Also, there should not be any break in the service. It must be continuous.

Note, the condition of 5 years service has a small relaxation. In the last year, mere service of 240 days would be considered as one year. Hence, You would be eligible for the gratuity after 4 years and 240 days of continuous service.

If are working in an organisation which works for 5 days in a week or less, mere 190 days would be counted as last one year. Therefore, in such case, you would be eligible for the gratuity after 4 years and 190 days.

Continuous service means uninterrupted service. But, it does include the interruption due to, leave, sickness or accident. The strike, lay-off, or a lockout is also not considered as an interruption. Indeed, any interruption which is not due to the fault of the employee, would not be counted. But, if you have taken a sabbatical or leave without pay, then your service would get interrupted.

2. Gratuity Only After Leaving Job

An employee is entitled to get gratuity only after the termination of the employment. This termination may be of retirement, resignation or job switch. So, It is clear, you are not going to get gratuity while in the job.

3. Death or Disablement Relaxation

The minimum 5-year service rule is not applicable in case of death or disablement. The gratuity amount would be given to the nominee or legal heirs.

4. Upper Limit of Gratuity

The government fixes an upper limit for the gratuity. An employer is not bound to give gratuity beyond this limit. Also, the Tax exemption would not be available for the amount over and above this limit. As of now, the gratuity limit is ₹20 lakhs.

5. Gratuity is Non-Taxable

Gratuity amount is totally tax-free. However, it should be given according to the prescribed gratuity formula. Any amount above this formula would be subject to the tax.

6. Employer Can give Excess Gratuity

An employer can give gratuity more than the prescribed formula. But the excess gratuity would be added to your taxable income.

7. Gratuity Limit

The gratuity amount is free from tax but this is subject to a maximum limit. If you get gratuity more than the limit, the excess amount would be taxable. The Government has recently increased the gratuity limit to 20 lakhs. Earlier it was 10 lakhs.

8. Gratuity Rules Applicable If Employees Are More Than 10

Every factory or establishment would pay gratuity to its employees. The gratuity rules are not mandatory for the factory or establishment which employs less than 10 persons. The number of employees would be counted as the average of the last 12 months.

9. Protected Against Liabilities

No court can attach the gratuity amount. Whether there is a decree against the employee from a civil or criminal court.

10. Forfeiture Of Gratuity If There is a Damage

An employer can forfeit gratuity if an employee makes a loss to the company. The forfeiture would be to compensate for the loss. However, the employer must terminate the services of the employee because of this damage.

​Forfeiture of Gratuity

If an employee’s services are terminated due to any act, wilful omission or negligence causing damage or loss to or destruction of property of the employer, the employee’s gratuity shall be forfeited to the extent of damage or loss.

The full amount of gratuity can be forfeited if an employee’s services have been terminated due to:
a) His riotous or disorderly conduct or any other violent act;
b) Committing an offense involving moral turpitude.

No court decree or court order can attach the amount payable under the Gratuity Act. This means that your gratuity will be still payable to you even if your employer goes bankrupt. No court order can stay this.

List of ​forms used for Gratuity

Form I-Application for the payment of Gratuity

Form J-Application for the payment of Gratuity by NOMINEE

Form K-Application for the payment of Gratuity by LEGAL HEIRS.

Form F-Nomination Form

Form G-To make a fresh nomination

Form H-Modification of the nominee

Form L-Issued by the employer to the employee stating amount and date of payment.

Form M-Issued by employer stating reasons for rejection.

Hope this much information is sufficient to understand the “Gratuity – New Limit, Eligibility, Formula, Taxation and Calculator”. Let me know if you have any doubts.

​Frequently Asked Questions on Gratuity

Q. I resigned from my job after working for 4.5 years. Would I be eligible to receive gratuity?

A) No. You need to complete at least 5 years of service to be eligible for payment of gratuity. However, according to a ruling of Madras High Court, an employee is eligible for gratuity in case he completes 240 days of service in the fifth year of service In yet another case, if the employee dies during his employment, his legal heir will be eligible for gratuity even if he did not complete 5 years of service

Q. If an individual is a contract employee, will he receive gratuity upon completing 5 years in service?

A) If the individual is on the rolls of the company rolls, he will be regarded as an employee. He will be eligible to receive gratuity. But, if he works under a contractor who is not part of the company, then contractor will be responsible to provide the gratuity and not the company

Q. Is there any upper limit on the amount of gratuity that will be received?

A) Yes. The amount of gratuity paid by a company cannot exceed more than Rs. 10 lakh, irrespective of the number of years of service of the employment.

Q. How much time does the employer take to release the amount of gratuity?

A) Ideally, as per the government mandate, the employer should remit the gratuity within 30 days from the date of full and final settlement of the employee. In case of any delay in payment, the employer is liable to pay a simple interest on the gratuity from the due date until the date when payment is made.

Interest rates applicable for Loan against Property

Generally mortgage loans are charged a lower interest rate as compared to personal loans. As a result, the EMIs are also lower compared to that of personal loan. The interest charges varies according to the type of property. For instance, rate of interest on a residential property would be different than that of a commercial property. As of now, mortgage loan interest rates lie in the range of 12% to 15.75%. The rates could also differ based on whether you are salaried or self employed. In addition to this, a processing fee equal to 1-2% of the total loan amount is also charged by the banks