Gratuity Calculation & Rules in India – Eligibility, Formula & Tax Benefits

Gratuity is a statutory benefit that applies to all employees who have rendered their service to an organisation for a specific period. The gratuity amount is usually paid to the employee in lump sum based on the number of years of service they render. The gratuity benefit is payable to the employee under the following circumstances:

• Resignation from employment
• Death of the employee
• Retirement
• Employment termination

Employers consider the employee’s last drawn salary as the basis for. gratuity calculation It is an integral part of the employees’ salary structure, and it is regulated under Section 4(1) of the Payment of Gratuity Act 1972. Although the act states that the gratuity benefit is payable after completing five years of service with the same organisation, there is an ongoing debate relating to its eligibility.If you are wondering if you are eligible to get gratuity if you have completed more than four years of service but not completed five years? Then the answer lies in Section 4(2) of the Payment of the Gratuity Act. It spells out the condition for employee gratuity if he/she has not completed five years of service.The section says that for every year of completed service (more than six months), the employee can receive gratuity. As an employee, if you work in an organisation for more than six months, you are entitled to get the gratuity.

You can calculate your gratuity amount, using the following formula:

Gratuity = N x B x 15/26

In the above formula,

• N is the number of years of service rendered
• B is the last drawn salary (Basic salary + Dearness Allowance)

Let us under the gratuity calculation with an example.Let us assume that you were employed with a company named ABC for five years. Your last drawn salary (basic + DA) at the time of leaving the company was Rs. 50, 000.As per the above formula, your gratuity will be calculated as:

Gratuity = 5 x 50,000 x 15/26 = Rs. 1, 44, 230

Note: Although there are 30/31 days in most months of the years, under the Payment of Gratuity Act, 1972, the number of working days in a month is 26.

The employer must pay the gratuity amount within 30 days from when it becomes payable to the beneficiary. However, if the employer fails to pay the amount within the specified period, as a beneficiary, you are entitled to receive a simple interest on the amount.You must take note that the gratuity amount is payable only in cash unless you, nominee or the legal heir make a specific request for the amount to be paid in DD (Demand Draft) or Cheque.

If you don’t get the gratuity payment within 30 days from the date it becomes payable; you can write a complaint to the Controlling Authority. Non-payment of gratuity is a punishable offence, and the employer shall be charged with imprisonment for a term not less than three months and/or with a fine not less than Rs. 10,000 and not more than Rs. 20,000.

The employer can forfeit the gratuity payment to the employee under specific conditions, where the employee’s service is terminated due to any of the following reasons:

• Violent behaviour with other employees within the organisation premises
• Any disorderly misconduct
• Involvement in any illegal activities or committing an offence involving moral turpitude

The employer has the right to forfeit the gratuity partially to the extent of damage or loss caused or forfeit the full amount.

If you have completed one year of service in an organisation, you must make a nomination for the gratuity payment in the event of your untimely demise. You can appoint more than one person as a nominee by filling Form F. Ensure that you fill the nominee details correctly so that it is easily verifiable at the time of gratuity payment.You can choose to change the nominee details or the person by giving written notice to the employer and filling Form H. If you fail to nominate a beneficiary, the gratuity amount will be paid to the legal heir.

As per the Gratuity Act, the maximum gratuity amount payable to the employees is limited to Rs. 20 lakhs over the entire working life. Hence, even in case of multiple gratuity payments, the total amount shall not exceed Rs. 20 lakhs.

Under the Income Tax Act, the gratuity received up to a limit of Rs. 20 lakhs, it is exempted from tax.

Gratuity is an essential aspect of your employment benefits. Ensure that you are aware of your rights in terms of gratuity, and if you are employed with the same organisation for four years and 240 days, you are entitled to receive it.