Gratuity

HR & Payroll Financial Services

Gratuity refers to the amount that an employer pays to his employees, in return for services offered by him to the company. However, it is payable only to the employees have been employed by the company for a period of 5 years or more. It is governed by The Payment of Gratuity Act, 1972.

The employee can get the gratuity before 5 years if they get disabled in an accident or due to a disease. Gratuity if mainly dependent on your last drawn salary and the years of service you have rendered to your employer.

Calculation of Exemption of Gratuity

The amount of gratuity received by any government employee (whether central / state / local authority ) is exempt from the income tax

• Any other eligible private employee whose employer is covered by The Payment of Gratuity Act, LEAST of the following amounts will be allowed as exemption

• (i) Actual amount of gratuity received

• (i) (ii) The eligible gratuity { Calculated based on 15 / 26 * Last drawn salary * Completed years of service or part thereof in excess of 6 months }

• (i) The eligible gratuity { Calculated based on 15 / 26 * Last drawn salary * Completed years of service or part thereof in excess of 6 months }

If you have worked for say 5 years 5 months, it will be rounded to 5 years and similarly if you have worked for 5 years 6 months, it will be rounded to 6 years.

Eligibility to receive Gratuity

The employer covered under the Payment of Gratuity Act will pay gratuity to the employee if employee satisfies the following conditions:

The employee should be a full-time employee

The employee should be in continuous service for a minimum period of 5 years

The employee can also get gratuity upon resignation, superannuation, disablement due to accident or disease, or death. The condition of 5 years is not applicable in the case of disablement or death.

Illustration for Understanding