Gratuity is one of the benefits enjoyed by salaried employees in India. However, they can enjoy this, only after working for a certain period with a single employer. As your gratuity is largely tax-free income, calculating gratuity should be a factor while switching jobs and deciding if this is worth it.
Gratuity meaning
Known as आनुतोषिक in Hindi, Gratuity is a benefit that salaried employees in India enjoy under the provisions of the Payment of Gratuity Act, 1972.
Delivering its ruling in the Delhi Cloth and General Mills Co Ltd versus their workmen, the Supreme Court said: “The objective of providing a gratuity scheme is to provide a retiring benefit to workmen, who have rendered long and unblemished service to the employer and thereby contributed to the prosperity of the employer.”
Under the provisions of the gratuity law, employees who have completed at least five years in a company, are eligible to claim the gratuity benefits. However, gratuity is also offered to employees without completing five years of service with a company, in case they become disabled due to an accident or illness during their work tenure with the company.
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Do all companies provide a gratuity benefit?
In India, the gratuity benefit is offered by companies with over 10 employees. An employee working in a public sector company, private company, farm, factory, minefield, oil field, port, or plantation, can claim gratuity if his workplace employed more than 10 people on any day during the preceding 12 months. The gratuity law covers all skilled, unskilled, manual, supervisory, technical and clerical workers.
In April 2022, the Supreme Court ruled that Anganwadi workers and helpers appointed to work in Anganwadi centres were also entitled to gratuity as ‘Anganwadi centres also perform statutory duties and have become an extended arm of the government’.
Service period calculation to claim gratuity
To arrive at five years of continuous service, a period of more than 240 days of continuous service is considered as a full year under the provisions of the Payment of Gratuity Act. So, if you quit your job after four years and 240 days of service, you will get gratuity. In case, you work in a company which has less than a six-day work week, continuous service of over four years and 190 days is considered as a continuous service of 5 years.
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Time of gratuity payment
Gratuity is paid at the time of an employee’s retirement or termination or death.
Eligibility criteria for gratuity payment
Under Section 4 (1) of the Act, you need to meet one of the following criteria to claim gratuity from your employer:
- You should have quit your job after 5 years of work
- You are retiring
- In case of your superannuation*
- In case you suffer disability due to illness or accident
- In case the employee passes away**
*Superannuation means the attainment of such age by an employee as is fixed in the contract or conditions of service about the age at which the employee shall vacate the job.
**If an employee dies, the gratuity is paid to his nominee. In case there is no nominee, the gratuity amount will be paid to the deceased’s legal heirs.
Calculating gratuity: Basic principles
- For calculating the gratuity, salary includes your basic salary, dearness allowance and commission. Salary components like House Rent Allowance and Leave Travel Allowance are not considered while calculating salary for gratuity.
- For each year of service, the company is liable to pay an amount equalling 15 days of last drawn salary.
- More importantly, if an employee works for over 6 months in the last year of service, he will be paid for the entire year while calculating the gratuity. For example, if you complete nine years and six months of continuous service to a company, you will be paid gratuity for 10 years and not nine-and-a-half years.
- For calculating gratuity, one month is counted as 26 days. This basically means that your 15-day salary will be calculated as (monthly salary*15)/26. This number multiplied by the number of years in service will be the gratuity amount.
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Calculating gratuity: Formula
If employed in companies covered under the Gratuity Act
Gratuity = n x b x 15 / 26
N stands for the employee tenure at the company
B stands for his last drawn salary
Supposing you worked for a company for 15 years and your last drawn basic salary was Rs 50,000, your gratuity would be:
15 x 50,000 x 15/26 = Rs 432,692
Calculating gratuity: Formula
If employed in companies not covered under the Gratuity Act
Gratuity = 15 x last drawn salary x the working tenure/30
Suppose you worked for a company for 15 years, and your last drawn basic salary was Rs 50,000, your gratuity would be:
Gratuity Amount = (15 x 50,000 x 15) / 30 = Rs 375,000
In either of the cases, the gratuity amount cannot exceed Rs 20 lakhs.
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Calculating gratuity in case of death of an employee
| Less than a year | 2 months’ salary |
| Between one and 4 years | 6 months’ salary |
| Between 5 and 10 years | 12 months’ salary |
| Between 11 and 19 years | 20 months’ salary |
| 20 years or more | Half of the basic salary for each completed six-month period, capped at the maximum of 33 times of the basic salary. |
Delay in gratuity payment
Under Section 7 of the gratuity law, your gratuity needs to be paid to you by your employer within 30 days of your last working day. In case the payment is delayed beyond 30 days, the employer will have to pay an interest on the amount.
While delivering its ruling in a related case, the Gujarat High Court, in April 2022, said that there was a clear mandate on the employer under the provisions of Section 7 to the Payment of Gratuity Act to pay gratuity within time or pay interest in case of delay. This payment on interest is mandatory in case of a delay and not discretionary, the HC said.
Tax on gratuity
India’s Income Tax (I-T) law treats gratuity as salary and taxes it under ‘income from salary’. In case the gratuity is paid to the nominee of an employee due to his death, the gratuity amount is paid under ‘income from other sources’.
In either case, your minimum payable gratuity is tax-fee under Section 10 (10) of the I-T Act. At least the following received by an employee is exempted from tax:
- Rs 25 lakh*
- Actual gratuity received
- 15 days’ salary based on the salary last drawn multiplied by the number of years in employment
*The Centre on March 11, 2024, decided to increase the tax exemption limit on gratuity to Rs 25 lakh from earlier 20 lakh: a move that greatly benefitted those who spent many years working in an organisation.
With the change in the exemption limit, employees who had paid taxes on gratuity exceeding Rs 20 lakh, will be able to claim the exemption if they receive gratuity in future. Note that the exemption limit of Rs 25 lakh is to be applied cumulatively to gratuities received by you in your lifetime.
In case the gratuity is paid for more than 15 days of each completed year of service, the excess amount will become taxable, irrespective of the overall amount of gratuity. However, gratuity received by an employee of a Central, state or local government agency is fully tax-exempted without any upper monetary limit.
FAQs
What is a gratuity?
Gratuity is a reward offered only to long-serving employees in a lump-sum amount.
What is the maximum money one can get as gratuity in his entire work life?
The gratuity amount cannot exceed Rs 20 lakhs. Any money beyond this amount would be treated as ex-gratia.
Can a contract employee receive gratuity?
No, only those on company payrolls get this benefit.
Can gratuity be forfeited by the company?
Yes, your company can forfeit your gratuity in case you have been terminated because of wilful omission or negligence, causing damages or loss to the company, including destruction of properties and their belongings. However, the lapse in gratuity will be equal to the damage or loss caused.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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