Gratuity Calculation: Gratuity is a crucial financial security measure for people in India. It not only recognizes an employee’s years of hard work but also provides financial support after retirement. For employees in both the private and government sectors, gratuity acts as a loyalty bonus, awarded by the employer as a reward for long service. If you work for a company for five consecutive years, you are eligible for gratuity. Let’s learn more about it.

Learn What is Gratuity

Gratuity is a financial benefit provided by a company to an employee upon leaving or retiring. Gratuity was implemented under the Payment of Gratuity Act of 1972. This Act applies to organizations with 10 or more employees.

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Eligibility Rules for Gratuity

According to the law, an employee is entitled to gratuity if they have worked for the company for five or more consecutive years. However, if an employee dies or becomes permanently disabled, this five-year requirement is waived, and the gratuity amount is provided to their family. The purpose of this rule is to ensure that the employee or their family does not face financial insecurity under any circumstances.

How is Gratuity Calculated?

Gratuity is calculated using a specific formula: Gratuity = (15 × Last Salary × Years of Service) ÷ 26. This final salary includes basic pay and DA. For example, if an employee’s basic salary is ₹65,000 and they have worked for the company for seven years, the gratuity would be approximately ₹262,500. If someone has worked for 10 years and their DA is 20 percent, they can receive a benefit of approximately ₹375,000. Currently, the maximum limit for gratuity is set at ₹20 lakh.

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When and how is gratuity paid?

Gratuity is usually paid when an employee retires. If the employee quits their job or has to leave the company for some reason, many companies now pay gratuity online during this time as well.

Tax on Gratuity

Regarding the tax rules on gratuity in India, the entire gratuity amount is tax-free for government employees. However, this exemption is limited for private sector employees. If your company falls under the Payment of Gratuity Act 1972, the tax exemption will be given on the lesser of the three amounts: ₹20 lakh, the formula-derived amount, or the actual gratuity.