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Everything You Need to Know About Gratuity
Understanding Gratuity
Gratuity is a lump sum amount paid by employer to employee as a token of appreciation for services rendered. It's governed by the Payment of Gratuity Act, 1972.
Gratuity Formula (Covered):
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 26
For employees covered under the Act
Gratuity Formula (Not Covered):
Gratuity = (Last Drawn Salary × 15 × Years of Service) ÷ 30
For employees not covered under the Act
Eligibility: Minimum 5 years of continuous service (except in case of death/disability)
Important Points About Gratuity
- Minimum 5 years of service required (4 years 240 days considered as 5 years)
- Maximum gratuity limit is ₹20 lakhs as per government rules
- Gratuity is tax-free up to ₹20 lakhs for government employees
- For private employees, least of 3 amounts is tax-exempt
- Last drawn salary includes Basic + DA + Commission on sales
- 6 months or more in last year of service counted as full year
- Gratuity can be paid even during employment for certain reasons
- Nominee receives gratuity in case of employee's death
- Gratuity is payable within 30 days of becoming due
Frequently Asked Questions
Who is eligible for gratuity?
Any employee who has completed 5 years of continuous service with an organization is eligible. This applies to all establishments with 10+ employees. Special cases like death or disability don't require 5 years.
What is included in last drawn salary?
Last drawn salary includes Basic Salary + Dearness Allowance (DA) + Commission on sales. HRA, bonus, overtime, and other allowances are NOT included in gratuity calculation.
Is gratuity taxable?
For government employees, gratuity up to ₹20 lakhs is tax-free. For private employees, the least of these three is exempt: (1) ₹20 lakhs, (2) Actual gratuity received, (3) 15 days salary for each completed year.
Can gratuity be forfeited?
Yes, gratuity can be forfeited wholly or partially if employee's services are terminated for misconduct, willful omission, or negligence causing damage or loss to employer.
What if company refuses to pay gratuity?
You can file a complaint with the Controlling Authority under the Payment of Gratuity Act. The employer can face penalties including imprisonment up to 2 years for non-payment.
Is gratuity applicable for contract employees?
Contract employees are eligible if they complete 5 years of continuous service. However, the nature of contract and terms of employment matter. Daily wages/piece-rate workers completing 5 years are also eligible.
Complete Gratuity Guide
Everything you need to know about gratuity benefits in India
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