Gratuity

Gratuity is a financial benefit provided to employees in India as a token of appreciation for their service to a company. It is governed by the Payment of Gratuity Act, 1972, which applies to all organizations with 10 or more employees. Gratuity is payable to an employee upon resignation, retirement, or termination, provided they have completed at least five years of continuous service with the organization.

Key Features of Gratuity Benefit:

1. Eligibility Criteria

• The employee must have completed at least five years of continuous service with the employer to be eligible for gratuity.
• Gratuity is payable in case of resignation, retirement, or termination.
• In the event of an employee’s death or disablement, the five-year minimum service condition is waived, and the gratuity is paid to the employee’s nominee or legal heir.

2. Calculation of Gratuity

The formula for calculating gratuity depends on whether the employee is covered under the Payment of Gratuity Act or not. For employees covered by the Act, the calculation is based on the following formula:

Where:

• Last Drawn Salary: Basic salary + dearness allowance (if applicable).
• 15: Represents 15 days of salary for each year of service.
• 26: Represents the number of working days in a month (excluding weekends).

For employees not covered under the Gratuity Act, the formula is:Gratuity=Last Drawn Salary×15×Years of Service30\text{Gratuity} = \frac{\text{Last Drawn Salary} \times 15 \times \text{Years of Service}}{30}Gratuity=30Last Drawn Salary×15×Years of Service​

3. Maximum Gratuity Limit

• As per the Payment of Gratuity Act, the maximum gratuity amount payable to an employee is currently capped at ₹20 lakh.
• Any amount beyond this may be paid at the employer’s discretion or based on the company’s internal policies.

4. Taxation on Gratuity

• Gratuity received by government employees is fully tax-exempt.
• For non-government employees, gratuity is tax-free up to the lower of the following three amounts:
  • ₹20 lakh.
  • Actual gratuity received.
  • Amount calculated as per the formula under the Payment of Gratuity Act.
• Any gratuity received beyond the tax-exempt limit of ₹20 lakh is taxable under income from other sources.

5. Payment Timeline

The employer must pay the gratuity amount within 30 days of the employee’s last working day. Failure to pay within this period may result in interest being added to the gratuity amount.

6. Gratuity in Case of Death or Disability

• If an employee passes away or is disabled during their tenure, the gratuity is paid to the nominee or legal heir, irrespective of whether the employee had completed five years of service.
• In case of death, the following slabs are used to determine the gratuity amount:
  • Less than 1 year of service: 2 times the basic salary.
  • 1 to 5 years of service: 6 times the basic salary.
  • 5 to 10 years of service: 12 times the basic salary.
  • 10 years or more of service: 20 times the basic salary.

7. Gratuity for Contractual Employees

• Contract employees who work for an organization for at least five continuous years may also be eligible for gratuity benefits under certain conditions.
• Temporary or seasonal employees can be entitled to gratuity if they meet the service requirement.

8. Nomination

• Employees are required to nominate someone (usually a family member) to receive the gratuity amount in the event of their death. This ensures that the benefit is transferred to the nominee without delay.

9. Exemptions

• Apprentices and trainees are generally not entitled to gratuity.
• Gratuity does not apply to employees dismissed for willful misconduct or gross negligence.

Important Considerations:

• Continuous Service: If an employee takes approved leave or any interruptions in service that are not the fault of the employee (such as maternity leave, accident leave, etc.), it is still considered continuous service.
• Contractual Provisions: Some employers may offer better gratuity terms, but they cannot offer worse terms than those mandated by the Payment of Gratuity Act.
• Gratuity in Case of Resignation: Even if an employee resigns after completing five years of service, they are entitled to gratuity.

Conclusion

Gratuity is a key retirement benefit in India that helps employees secure financial stability after their service ends. It rewards long-term service and provides financial support in cases of retirement, resignation, or untimely death.