This article provides complete information about how to calculate gratuity for private sector employees and for the government sector employees. The article also provides Gratuity calculation formula and the key points related the same.
What is Gratuity ?
Gratuity is a payment given by an employer to the employee at the time of end of his/her employment. Gratuity is payable at the end of employment only if the service of minimum 5 years is completed by the employee.
In case of death of employee, the 5 year period is not mandatory and the gratuity amount is paid to the nominee of the employee.
Gratuity provides social security to the workman/employee after retirement/ end of service.
Eligibility for Gratuity
Gratuity is paid as per the “Payment of Gratuity Act”.
Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, –
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease. The completion of continuous service of five years is not necessary where the termination of the employment of any employee is due to death or disablement.
How to calculate gratuity
Once an employee becomes eligible for gratuity payment as per above criteria, the gratuity amount is calculated.
The eligible employee should be paid 15 days of basic salary for every completed years of service, as gratuity. Following is the formula for the same –
Gratuity Amount = (No. of years in service) x (Last drawn Monthly Basic Salary & Dearness Allowance) x 15/26
Example of Gratuity calculation –
Following is an example of Gratuity calculation as per above formula –
If the employee has completed 6 years of service and his /her last drawn monthly basic salary was Rs. 52,000, his gratuity will be calculated as below –
Gratuity Amount = (6) x (52,000 ) x 15/26 = Rs. 1,80,000
Tax free amount of Gratuity
As per the amendment in Gratuity Act in 2018, the maximum tax free amount for private sector employees is Rs. 20 Lacs. It means that if calculated gratuity amount is above Rs. 20 Lacs then the amount beyond Rs. 20 Lacs will be taxable.
For example, if the calculated gratuity amount is Rs. 22 lacs then 20 Lacs will be tax free and remaining Rs. 2 Lacs will be taxable as per the applicable tax bracket of the person.
Payment of Gratuity Act
Following is the link from which the Payment of Gratuity Act, 1972 can be downloaded – https://maitri.mahaonline.gov.in/pdf/payment-of-gratuity-act-1972.pdf
- Recent changes internal link
Key points for Gratuity calculation
- The employee must have completed minimum 5 years of service at the time of end of employment, to be eligible for Gratuity.However, In case of death or disablement there is no minimum eligibility period.
- Only basic salary & Dearness Allowance (if applicable) are considered for calculation of Gratuity
- Calculated on the basis of last drawn salary
- Any amount beyond Rs. 20 Lacs is taxable
If you have any queries related to Gratuity calculation, you can post them in the comments section below.