Gratuity is another form of gratitude offered to the employees in monetary terms for providing services to the company. It is one of the most important instruments of social security benefit provided by the Gratuity Act. After an employee retires, they would get benefited through Gratuity with the lump sum amount they receive. Job hopping from one organization to another may help you with a hike in your salary package, but staying on with your employer for a long time has its own benefits. Gratuity benefit is one of them.

What does the term Gratuity mean?

Gratuity is a scheme offered by an employer, also a benefit which is mandatory on the part of an organization to pay to each of their employees under gratuity act 1972. This act also states that every organization or a set up that has more than 10 employees or more on the payroll on any day of preceeding 12 months, has to provide gratuity to its employees who have completed at least 5 years of service by paying an amount basis the gratuity calculation formula specified under this act.

When is it payable?

Gratuity is payable on retirement, death, retrenchment, resignation, termination of services, or disablement. In a scenario of death or disability in any form, the condition of 5 years of continuous service is waived off. In this case, the nominee of the employee is paid gratuity even if the person has worked for only 1 year. It can be called as the Thanksgiving from an employer to the employee.

While the rules state that gratuity requires 5 years of continuous service, at the same time, it also includes all approved leaves, legal strikes or weekly offs. It means that if you have remained absent for any of the following reasons that are valid, approved and legal, it shouldn’t be treated against any continuous service condition.

How is Gratuity calculated?

If you are secured under the Payment of Gratuity act, 1971, the amount of gratuity is calculated as stated below:

• Employees are entitled to receive the salary of 15 days for every completed years of gratuity
• Only your basic pay and DA (if any) is taken into consideration while accounting for the salary. Thus, any bonus, HRA, or special allowance will not be considered while calculating gratuity
• Number of working days considered for gratuity are 26

Gratuity payable = 15 days* Number of years completed
26 working days

For instance, if you earn a monthly salary plus DA of Rs 40000 and you’ve served for a period of 5 years and 6 months, which is equivalent to 6 years, then the computation is as follows:

Gratuity = 15 * 40000 * 6 years
26 working days

Tax Treatment of Gratuity

For government employees, the amount received through gratuity on retirement or in the case of death of the employee, the entire amount is exempted from income tax. In case of non-government employees, the income tax rules on gratuity are applicable depending on the fact of whether employees are covered under the Gratuity Act, 1972 or not. Please note that if you have served a period of 5 years each at 4 different organizations, and if your amount exceeds Rs. 20 lakhs which is the maximum exempted amount, then whatever additional amount has been earned needs to be taxed by adding in “Income from other sources.”